Honeywell (HON 1.66%) cheered the market and the industrial sector with its first-quarter earnings and guidance. The company has long had a reputation for being one of the highest-quality names in the industry. So if anyone was going to buck the trend of full-year guidance reductions due to supply chain issues, China lockdowns, raw material price increases, the war in Ukraine, and the omicron variant, it was Honeywell. Indeed, Honeywell raised its full-year guidance -- and a look at the earnings confirms excellent momentum through 2022. Here's the lowdown.
Honeywell first-quarter earnings
this is something of a transition year for Honeywell. Its investments in high-growth businesses, such as its quantum computing business Quantinuum, are expected to result in billions of dollars worth of revenue in a few years. Still, they are holding back near-term profitability and cash flow. For example, management is guiding toward free cash flow (FCF) in 2022 of $4.7 billion to $5.1 billion -- but excluding the impact of Quantinuum, the FCF guidance would be $5.9 billion to $5.3 billion.
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Having accepted the formula of short-term earnings constraints for long-term growth enhancements, investors were still concerned that the host of issues plaguing the industrial sector would further impact Honeywell's earnings in 2022. Fortunately, those fears are so far proving unfounded. In fact, management increased its full-year earnings guidance even after absorbing pressure from some of the items listed in the introduction. Among the points included in its report:
- Full-year revenue guidance of $35.5 billion to $36.4 billion, compared to prior guidance of $35.4 billion to $36.4 billion, even with an estimated $400 million in lost sales to Russia due to sanctions.
- Full-year segment margin guidance was maintained at 21.1%-21.5%.
- Full-year adjusted EPS guidance of $8.50-$8.80 compared to prior guidance of $8.40-$8.70.
For reference, the midpoint of the EPS guidance puts Honeywell at a 2022 price-to-earnings (P/E) ratio of around 23 based on the current price of $197 -- a pretty good ratio for a company gearing up for double-digit earnings growth in the coming years.
How and why Honeywell raised earnings guidance
There are three key reasons why Honeywell bucked the trend in the industrial sector:
First, total orders increased by 13% year-over-year in the quarter, and long-cycle orders increased by 20%. That's a great sign for future growth, and Honeywell's backlog increased by 9% in the quarter to $28.5 billion, representing around 80% of estimated sales in 2022. Of course, there's a challenge around meeting that backlog in terms of managing costs in an inflationary environment. Still, the strength of end-market demand is a significant plus.
Second, most industrial companies are raising prices on rising costs and margin pressures to offset cost inflation. However, not all companies can do so as well as Honeywell -- a sign of the strength of its product offerings. Indeed, discussing pricing on the earnings call, CFO Greg Lewis said, "We expect that our disciplined price actions will keep us ahead of the current inflationary environment, contributing approximately 5% to our sales growth." That's a figure "higher than we anticipated in our original guide" and more than offsets the 1% in sales lost to Russia. So whichever way you cut it, Honeywell has significant pricing power.
Finally, despite some challenges (lost Russia revenue, supply chain issues, auto production weakness), management slightly upgraded its guidance for growth in its end markets in 2022. The only positive change came in its Honeywell Building Technologies (HBT) business, where it now sees high-single-digit to double-digit sales growth. Still, it's a good result in the current environment.
What's next for Honeywell
The results and guidance further prove that high-quality companies positioned in favorable end markets can find ways to offset inflationary and supply chain pressures. Admittedly, much of Honeywell's guidance is based on the assumption that these issues ease in the second half, so there is still risk around its earnings guidance. However, Honeywell isn't alone in expecting a second-half improvement. The difference is that the company raised its guidance going into the summer, while others cut guidance.
