The industrial sector enters 2016 in a funk, and the outlook for the rest of the year is uncertain at best. In such an environment, many investors searching for so-called "safe haven" stocks. Alongside companies like General Electric Company (NYSE: GE) and Danaher Corp (NYSE: DHR), Honeywell International (NYSE: HON) is frequently mentioned by the analyst community as a potential candidate. So, without further ado, let's take a look at Honeywell International's prospects in 2016.
Aerospace, particularly avionics, is Honeywell International's key end market. Image source: Honeywell International website.
Safe havens
Honeywell's safe-haven proposition differs from the likes of Danaher and General Electric in the sense that the latter are stocks undergoing significant corporate actions in 2016. In other words, a large part of their upside will come from self-help activities. For example, readers already know about General Electric's growth opportunity from the Alstom acquisition, shift to industrial production, and production ramup on some key programs.
Meanwhile Danaher is a company with relatively stable end markets generating a large part of its revenue from recurring revenue streams. Moreover, the company has upside from the successful integration of Pall Corp, and from engineering a split of the overall company.
So what does Honeywell International offer safe haven seekers?
Good end markets
Simply put, Honeywell has relatively favorable end markets. A breakout of the mid-point of Honeywell's 2016 guidance for its three segments is shown below.
Source: Honeywell International presentations. All figures are mid-point of company guidance unless stated. BP is basis points, where 100BP equals 1%.
Aerospace is one of the bright spots of the industrial sector, as Boeing and Airbus continue to report strong airplane sales, and Honeywell's call for 1% to 2% core organic revenue growth in the segment belies stronger underlying growth. The segment is split into four sections, with commercial aftermarket (representing 30% of 2014 aerospace segment sales) and Defence & Space (31%) forecast to grow low single-digits in 2016.
The Aerospace segment also contains a Transportation Systems (24%) division that manufactures turbochargers and automotive aftermarket parts, from which management predicts low to mid single-digit growth in 2016.
In fact, the only part of Aerospace forecast to see sales drop in 2016 is Commercial Original Equipment Manufacturer (17%), or OEM. However, there is a reason for this. Essentially, Honeywell is granting incentives to OEMs on newer aircraft in 2016 in order to establish an installed base on the aircraft -- something beneficial for the generation of long-term revenue streams. Without the incentives, management believes Commercial OEM sales would have grown in the low single-digits, but as it stands, the forecast is for a mid single-digit decline.
Honeywell International's building controls look set for good growth. Image source: Honeywell website.
ACS stands for Automation and Controls solutions and its key end market is the construction industry. Despite fears of a slowdown in China, Honeywell is still forecasting low single-digit growth there. Partidularly for its residential, commercial, and industrial construction markets, and other companies (such as Ingersoll Rand) have been corroborating Honeywell's views. The ACS segment is expected to grow reported revenue 9% to 12% largely because of the integration of Elster.
Performance Materials and Technologies, or PMT, is clearly the most challenged segment because of its oil & gas exposure, but it's not a whitewash across the segment. Advanced materials (38% of 2014 PMT sales), which includes composites for body armour and ballistics materials, is expected to grow mid single-digits led by new product commercialisation. Meanwhile, process solutions (30%) revenue is expected to be flat. It's no surprise that UOP (31%), a company providing catalysts and adsorbents to the refining and processing industries, is forecast to decline mid single-digits in 2016.
What it all means
Only two of Honeywell's product lines (commercial OEM-Aerospace, and UOP-PMT) are expected to experience revenue declines in 2016, and they only represent around 14% of total sales. Clearly, if oil prices weaken, then UOP and process solutions-PMT (around 8% of total revenue) prospects will get worse. However, as long as the global economy holds up, its aerospace and construction markets look to be in good shape, and the company has ongoing margin expansion (see table above) plans in progress.
All told, there is no such thing as a completely safe haven, but Honeywell looks to be one of the better-positioned industrial companies for 2016. The industrial outlook is uncertain, but if you're looking for a stock to outperform the industrial sector, then Honeywell could fit the bill.
