Please ensure Javascript is enabled for purposes of website accessibility

Why Is Everyone Talking About Honeywell Stock?

By Lee Samaha – Nov 1, 2021 at 8:46AM

Key Points

  • Honeywell lowered its full-year sales guidance but raised its earnings forecast.
  • Unlike other industrials, the company is demonstrating it has the pricing power to overcome inflationary pressures.
  • End demand remains strong, and the company is well set to benefit in 2022.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A detailed look at the industrial giant's earnings.

Honeywell International's (HON 1.30%) third-quarter earnings attracted considerable attention because they were highly symbolic of the current earnings season. Moreover, understanding the themes within the results is the key to looking at other industrial companies set to report. Here's why Honeywell's earnings should help frame the way investors think about the market right now.

Honeywell's earnings had everything

There are three primary considerations that investors need to make in earnings season, and Honeywell's earnings contain all of them. First, it's no secret that the industrial sector is facing a significant number of cost challenges right now. Soaring raw material prices and supply chain difficulties raise the cost of doing business for many industrial companies.

A bag with inflation written on it.

Image source: Getty Images.

Second, the supply chain difficulties are creating revenue challenges for companies. For example, if Honeywell and others cannot get ahold of semiconductors, they can't make products that use them. In addition, Honeywell can't sell into them if customers in critical industries (such as automotive) have had to cut production due to supply shortages.

Third, on a more positive note, part of the supply chain difficulties is the strength of underlying demand, putting pressure on a supply chain that's tentatively getting back to normal after the worst of the pandemic. The hope is that the demand will remain in the future, and Honeywell will convert it into solid revenue growth in 2022.

I'll get into more detail in a moment, but first, here's a look at the change in management's full-year guidance. The table will serve as a reference point for discussion.

Full-Year Guidance

Current Guidance

Prior Guidance

Notes

Sales

$34.2 billion-$34.6 billion

$34.6 billion-$35.2 billion

Lower by $600 million at the midpoint

Segment margin

20.9%-21.1%

20.8%-21.1%

Slight improvement

Adjusted EPS

$7.95-$8.10

$8-$8.10

Small raise at the midpoint

Free cash flow

$5.3 billion-$5.6 billion

$5.3 billion-$5.6 billion

Maintained

Data source: Honeywell International. EPS = earnings per share. 

Cost challenges and pricing

Probably the most impressive part of Honeywell's earnings and guidance came from the company's ability to deal with raw material and supply chain cost pressures by raising prices and cutting costs where possible. During the earnings call, CEO Darius Adamczyk said, "We took swift pricing action that allowed us to stay ahead of the inflation curve."

In a nutshell, Honeywell appears to have the pricing power to more than offset inflationary cost pressures. Indeed, full-year margin guidance was slightly increased, despite a lowering of sales guidance by $600 million at the midpoint of guidance. On the matter of pricing power in the fourth quarter, CFO Greg Lewis said, "We expect margins to continue to benefit from pricing actions ahead of inflation, volume leverage, and ongoing productivity from our streamlined cost base."

An airplane taking off.

Image source: Getty Images.

Supply chain challenges and revenue

The supply chain challenges are biting Honeywell and will continue to do so in the fourth quarter. The negative impact on sales in the third quarter was around $300 million, with management expecting a further impact of $300 million to $500 million in the fourth quarter as well -- a large part of the reason management lowered full-year sales guidance.

Digging into the details, the most significant change to full-year sales guidance came from the aerospace segment.

Organic Growth Rate Guidance

Current

July

April

At January

Aerospace

Down mid-single digits

Down low-single digits

"Trending toward low end of range"

Flat to low-single digits

Honeywell Building Technologies (HBT)

Mid-single digits

Mid-single digits

"Trending better than expected"

Low-single digits

Performance Materials and Technologies (PMT)

Low-single digits

Low-single-digits

"Trending toward low end of range"

Plus or minus low-single digits

Safety and Productivity Solutions (SPS)

Double digits

Double digits

"Trending better than expected"

Double digits

Total

4%-5%

4%-6%

3%-5%

1%-4%

Data source: Honeywell International presentations.

However, the weakness mainly comes down to supply chain issues in the defense and space business. During the earnings call, Adamczyk said, "It's going to take some time to work through that, but we would have been down mid-single digits in Q3 had that not happened." For reference, the defense and space business was down 17% in the third quarter.

Honeywell International aerospace growth.

Data source: Honeywell International presentations. Chart by author. 

End demand

Finally, the evidence is that Honeywell's end demand remains strong. The commercial aerospace market continues to recover. In addition, HBT continues to see demand from non-residential construction building owners looking to ensure healthy buildings and improve building safety and efficiency.  

Sales in the SPS segment continue to surge as e-commerce warehouse demand remains strong and demand for productivity solutions (barcode readers, scanners, and data capture) grow in line with a reopening in the economy.

And finally, PMT orders will benefit from higher oil prices (catalysts and absorbents for refining and process solutions) and improving auto production (advanced materials).

Coupled with Honeywell's pricing power and ability to raise margin, the ingredients are there for a strong improvement in profitability in 2022 and beyond.

Lee Samaha owns shares of Honeywell International. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.