Please ensure Javascript is enabled for purposes of website accessibility

3 Things to Look for When Honeywell International Inc. Reports Earnings

By John Bromels - Jan 26, 2016 at 7:05AM

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

Honeywell reports Q4 2015 earnings on January 29. Here's what you should focus on.

Are things about to heat up for Honeywell? Image by Flickr user midnightcomm. 

Honeywell (NYSE: HON) had a good least, as far as we know. The full picture will be revealed on January 29, when the company reports earnings for the final quarter of 2015. Earnings reports can be big and complex, but here are three simple things to look for in Honeywell's earnings report.

1. How strong is overall growth?
In December, Honeywell predicted a slower-growth environment for 2016. Thus far, the markets seem to be bearing out that thesis, starting the year with one of the worst-ever performances by the major U.S. indices. Honeywell wasn't alone; General Electric (NYSE: GE) made a similar forecast.

The earnings report, though, isn't looking at 2016, but the last quarter of 2015. Even so, it can still offer investors a cue as to how things might shape up in the new year. That's because, despite the projected slowdown in the economic environment, Honeywell is predicting modest core organic growth on the order of 1%-2%. GE is likewise predicting growth, in the 2%-4% range.

If Honeywell's earnings report indicates it hit its 2015 growth benchmarks, this should give you confidence that its 2016 predictions are more likely to come to fruition. If, on the other hand, the final 2015 numbers are already missing the mark, it's probably a sign that 2016 is going to be a rough year indeed.

2. Are weak energy prices taking their toll?
You can probably already guess that the answer here is "yes." So the question is how much weak energy prices are hurting the Performance Materials and Technologies division. This is the Honeywell division with the most oil and gas exposure. In the first nine months of 2015, things haven't been pretty, with year-over-year revenues down 9%.

But, looking on the bright side, at least Honeywell doesn't have as much oil and gas exposure as some of its peers, particularly GE. Only about 11% of Honeywell's revenue comes from the oil and gas sector. By comparison, GE's Oil and Gas division accounted for 17% of its 2014 industrial revenue.

Investors should expect continued weakness in this division due to the continuing weakness in energy prices. However, if year-over-year revenue is down less than in prior quarters -- or if it somehow manages to increase -- this will be a very good sign for Honeywell as a whole.

Even exceeding expectations here may not be enough to protect the company as 2016 unfolds. Honeywell's growth forecasts are predicated on an average 2016 oil price of $45-$55 per barrel. With current prices under $30 per barrel -- at their lowest levels since 2003 -- there would have to be a big spike in prices or sustained upward movement by July at the latest to average out to $45-$55 per barrel for the year. If this doesn't happen...well, honestly, we'll probably have bigger problems than one small division of one industrial conglomerate, but suffice it to say that things could get rocky for Honeywell.

3. Is free cash flow flowing fast enough?
As a large industrial conglomerate, Honeywell is considered to be a stable investment. However, dividend investors will note that its current dividend yield is lower than those of its peers:


Dividend Yield (as of 1/19/2016)

Emerson Electric 4.40%
Siemens 4.25%
General Electric 3.23%
United Technologies 3.01%
Honeywell 2.45%

Source: Google Finance; author's chart.

Honeywell, though, has committed to grow its dividend over the next three years. Specifically, it has pledged to grow the dividend even faster than it grows earnings. And, of course, that means the company needs to be churning out sufficient cash to cover these expansion plans.

In the third quarter, this certainly wasn't an issue. The company's free cash flow was $1.4 billion, up 43%. But in an era of slower economic growth with potentially dangerous oil and gas exposure, Honeywell will again need to post solid FCF in the final quarter of 2015 to convince investors the dividend still has the potential to grow rapidly.

It's worth noting that even if earnings growth is negative, Honeywell can still honor its promise by keeping its dividend flat for a while (thus still growing it "faster than earnings").

What's next
These are uncertain times for the markets at large, and for Honeywell in particular. But if growth remains strong through the end of 2015, if declines in the Performance Materials and Technologies segment are modest, and if free cash flow remains sufficient, it bodes well for the company in 2016.

If, on the other hand, these indicators are below expectations, you'll want to keep a close eye on Honeywell in 2016. Selling outright would probably be premature, since other companies like GE are likely going to suffer from the same macroeconomic trends. Still, if this quarter and Honeywell's first quarter of 2016 don't measure up, you may want to consider other places for your money.

John Bromels has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. The Motley Fool recommends Emerson Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$74.93 (-0.33%) $0.25
Honeywell International Inc. Stock Quote
Honeywell International Inc.
$194.09 (0.06%) $0.12
Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
$91.94 (0.81%) $0.74
Siemens Aktiengesellschaft Stock Quote
Siemens Aktiengesellschaft
$54.24 (-2.49%) $-1.39
Emerson Electric Co. Stock Quote
Emerson Electric Co.
$86.59 (-3.82%) $-3.44

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

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