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The Keys to Honeywell's Earnings

By Dan Caplinger - Apr 17, 2013 at 6:04PM

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Can the conglomerate keep moving forward in a shaky economy?

On Friday, Honeywell (HON 2.63%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Honeywell does business in everything from helicopters to brake pads, with its fingers on the pulse of the industrial heartbeat of the global economy. That leaves the company potentially vulnerable to adverse macroeconomic trends, as we've seen recently from emerging-market slowdowns in China and recessionary conditions in Europe. Let's take an early look at what's been happening with Honeywell over the past quarter and what we're likely to see in its quarterly report.

Stats on Honeywell

Analyst EPS Estimate

$1.14

Change From Year-Ago EPS

9.6%

Revenue Estimate

$9.44 billion

Change From Year-Ago Revenue

1.5%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

How will Honeywell find new profits this quarter?
Analysts have gotten slightly more optimistic about Honeywell's prospects over the past few months, raising their earnings calls on the just-finished quarter by a penny per share and adding $0.02 to their earnings-per-share calls for the full 2013 year. The stock has also done reasonably well, rising about 10% since early January.

Honeywell is a much more broadly diversified company than many investors give it credit for, with its automation and control systems business earning the most revenue of its four main divisions. As part of a coalition with companies including Emerson Electric (EMR 2.30%), Praxair, and General Dynamics, Honeywell will participate on a $10 million contract from the Department of Energy to further clean-energy manufacturing. That contract is obviously small, but the prospects of clean-energy industry are much larger, and the project should help Honeywell gain valuable expertise in the area that it can put to more profitable use going forward.

But as Honeywell's most profitable segment, the aerospace industry still holds the most promise for the conglomerate, with strong prospects on multiple fronts. On one hand, as a supplier, Honeywell benefits from the trillions of dollars in revenue that Boeing (BA 6.45%) expects to see from new commercial aircraft orders in the next 20 years. Moreover, Honeywell expects strong helicopter sales throughout the world, with Latin America leading the way with a projected 34% increase in sales volume. The company has recently reaped further rewards from its presence in Latin America, as Embraer (ERJ 5.09%) awarded Honeywell a $2.8 billion contract to provide avionics for the next-generation E-Jet line.

To some extent, Honeywell is vulnerable to defense-related budget cuts. Yet the company has done a better job than many companies that receive defense contracts in broadening its revenue base well beyond government funding sources.

In Honeywell's report, one area to focus on is how the company's relationship with Textron's (TXT 4.09%) Cessna division is progressing. By diversifying beyond Boeing, Honeywell has the greatest chance to ensure its future regardless of which aircraft manufacturers perform the best.

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Stocks Mentioned

Honeywell International Inc. Stock Quote
Honeywell International Inc.
HON
$199.06 (2.63%) $5.10
The Boeing Company Stock Quote
The Boeing Company
BA
$132.05 (6.45%) $8.00
Emerson Electric Co. Stock Quote
Emerson Electric Co.
EMR
$86.39 (2.30%) $1.94
Textron Inc. Stock Quote
Textron Inc.
TXT
$65.67 (4.09%) $2.58
Embraer S.A. Stock Quote
Embraer S.A.
ERJ
$11.15 (5.09%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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