Honeywell Will Emerge Stronger From a Recession

Honeywell International (HON 0.30%) revealed an excellent set of second-quarter earnings that helped demonstrate its ability to come out of a potential recession in even more robust shape. The industrial conglomerate's mix of end markets, its excellent operational execution, and its investment in long-term growth initiatives make it well positioned to handle a slowdown, and long-term investors should consider it for their portfolio. Here's why.

Favorable end markets

CFO Greg Lewis put the point succinctly during the earnings call: "In fact, 65% of our sales address the commercial aviation, defense, energy, and non-residential end markets, which are all set up favorably to weather a potential recession." He has a point, backed up by the numbers in Honeywell's earnings and guidance.

The company reports four segments. Here's a look at how management's full-year guidance for organic revenue growth (in other words, factoring out any acquisitions) has changed through 2022, with any changes shown in bold.

Data source: Honeywell presentations.

The aerospace and defense supply chain remains challenged, and management lowered full-year growth expectations. Still, commercial aviation aftermarket sales rose 19% in the second quarter, with commercial aviation equipment sales up 22%. So it's not a problem of end demand, but rather suppliers working through labor shortages. Defense sales were down 11% in the quarter, but CEO Darius Adamczyk noted that "long cycle and the long-cycle bookings for the first half" were up in defense, and he expects tailwinds "as we head into 2023 and beyond," not least as defense budgets increase in the wake of the war in Ukraine.

Honeywell Building Technologies is focused on the non-residential market, and helps commercial building owners improve efficiency, create healthy buildings, and monitor carbon emissions. It's been a star performer this year, and Adamczyk noted booking rates were in the double digits. Moreover, Lewis said supply-chain restraints, notably when it came to semiconductors, were easing. That bodes well for HBT rival Johnson Controls' upcoming earnings. Like HBT, Johnson Controls has seen strong orders growth in 2022, accompanied by issues securing high-value components like semiconductors.

The performance materials and technologies (PMT) segment is on an excellent track. Organic sales were up 10%, with advanced materials sales up a whopping 21%. Honeywell has made capacity expansions in the business that "are not even yet shown in our results and will really come to fruition in 2023," according to Adamczyk. Process solutions sales were up 7% in the quarter, and management is "excited" about taking part in the LNG spending cycle -- something recently mirrored in oil services company Baker Hughes' outlook. The only "weak" point in PMT comes from UOP (catalysts and absorbents for refining and chemicals industry), which saw sales decline by 1%. Still, the loss of revenue from Russia is responsible for a 7% decline in sales. Excluding Russia, sales were up 6%, and based on the company's order book, and management is expecting a "very strong" fourth quarter for UOP.

Finally, in safety and productivity solutions (SPS), two of the four businesses reported robust growth (productivity solutions and services up 19% and advanced sensing technologies up 25%). Still, they failed to fully offset the 18% decline in safety and retail (driven lower by declines in COVID-19-related PPE sales) and a 25% decline in warehouse automation sales. The latter sells mainly into the e-commerce warehouse market and has grown at a 50% annual rate over the last couple of years, but the slowdown in consumer spending now is causing a pause in investment. 

All told, Honeywell's organic sales were up 4% in the quarter, and management now expects 5%-7% for the full year, compared to prior guidance of 4%-7%. 

Long-term growth initiatives 

I've previously discussed some of Honeywell's "breakthrough initiatives," including quantum computing, sustainable technology solutions, and Honeywell Connected Enterprise. Adamczyk highlighted their long-term potential by disclosing a deal with Archer Aviation to sell equipment on Archer's Urban Air Mobility Aircraft. In addition, Honeywell signed a partnership with EnLink Midstream to deliver Honeywell's carbon capture and hydrogen purification technologies.

Excellent execution in 2022 and beyond

Finally, despite the challenging operating environment, management has raised its full-year earnings and margin guidance through 2022. It appears ahead of the curve on raising prices to combat inflationary pressures. Contrast this with, say, industrial peer 3M, whose management has cut both in 2022, and constantly seems unable to fully offset cost increases.

All told, Honeywell stands well placed to emerge from a potential recession, and it's one of the few bright spots in an otherwise difficult industrial earnings season.