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Will General Electric's, 3M's, and Honeywell's Similar Outlooks Yield Similar Performance?

By John Bromels - Mar 31, 2016 at 7:55AM

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These three companies are all making similar predictions moving forward. But is one more likely than the others to outperform?

Image source: General Electric.

You've heard of comparing apples and oranges, but if you want to try to compare dragonfruit, bananas, and kiwis, look at predictions from some of the big industrial conglomerates. General Electric (GE -0.20%)3M (MMM -0.71%), and Honeywell (HON 0.75%) don't use many of the same metrics in their forecasts. They don't present their information in similar ways. And sometimes, they don't even seem to make sense at all.

Luckily, though, each one creates a coherent (if sometimes blurry) picture of what to expect in the remainder of 2016. And the outlooks for all three look remarkably similar. But as they all say in their warnings about forward-looking statements, that's not a guarantee of similar performance.

The big picture
All three companies caution that the macroeconomic environment remains turbulent and uncertain. Continued currency effects from a strong dollar may continue to weigh on earnings. Also, despite some signs for optimism about the price of oil, that recovery is far from guaranteed.

However, all three are forecasting earnings growth, even in this weak environment:

Company 2016 EPS Forecast % Change from 2015
3M $8.10-$8.45 7%-11%
Honeywell $6.45-$6.70 6%-10%
GE $1.45-$1.55 10%-18%

Source: Company presentations. Chart by author.

While 3M's and Honeywell's forecasts look similar in the high single or very low double digits, GE's appears to be about twice as large. But this is the danger of comparing apples and oranges. GE's entire company structure is in the middle of a monumental shift as it divests itself of many of its former GE Capital assets and its appliances business. In 2015, it reduced its share count through its share exchange of Synchrony Financial stock and plans to do more share repurchasing in the future. The company is also absorbing its largest-ever acquisition of Alstom.

As GE's CEO Jeff Immelt said at the end of the most recent earnings call: "This was more complicated than we like. Again, that will get better as time goes on." So while that EPS growth forecast looks impressive, it's part of a larger transformation. EPS for 2015 was up 17% over 2014's, while the company technically shrunk. You shouldn't buy on that one metric alone. 

Modest organic growth
All three companies are likewise forecasting modest organic sales growth in 2016:

Company Organic Sales Growth
Honeywell 1%-2%
3M 1%-3%
GE 2%-4%

Source: Company presentations. Chart by author.

Again, it looks as though GE is projecting the most growth, but this is organic growth only. Both 3M and Honeywell have made forecasts that overall sales growth, which includes acquisitions, will be higher. 3M is projecting 2%-4% total growth, while Honeywell anticipates 3%-6%. Both of these forecasts are more in line with GE's, although GE could certainly make a large acquisition (possibly Halliburton's drilling business) and see higher overall growth of its own.

Show me the cash
Earnings and sales are, of course, important for a company, but for large dividend payers like these, free cash flow is also a metric investors should keep an eye on. GE and Honeywell have estimated their FCF for 2016, while 3M has not. However, 3M has estimated its FCF conversion ratio, along with Honeywell, while GE hasn't. Apples and oranges again.

GE's prediction of $25 billion to $29 billion in free cash flow in 2016, roughly double 2015's number, is eye-catching, to be sure. But as you've probably guessed, it's partly the result of the company's restructuring. GE is planning to return a large amount of cash from GE Capital to the parent company -- the fruits of lots of asset sales in 2015 and 2016 -- which partly accounts for the size of this number. Honeywell's prediction of $4.6 billion to $4.8 billion, up 5%-10%, is more modest but still solid. It will help the company grow its dividend faster than it grows earnings, which it has pledged to do

The FCF conversion rate compares free cash flow to net income and is another way of looking at how much free cash the company churns out relative to its revenue. Honeywell is forecasting an impressive rate of 91% and says it hopes to be at 100% in the near future. 3M is forecasting an even higher range of between 95% and 105%.

All three companies seem likely to have plenty of cash to return to shareholders in 2016.

The Foolish bottom line
Given the uncertainty of the current economic climate, all three companies' projections are upbeat. And if oil prices rise more quickly than expected, it would be an additional boon to the companies' bottom lines. Make no mistake: These forecasts look good for investors.

That said, they're only projections and could be derailed. 3M or Honeywell might not be able to make sufficient acquisitions to grow sales volume in line with their predictions, for example. The government could prevent GE from moving cash from GE Capital to the parent company, leaving it unable to pass it on to shareholders. All three could suffer if oil prices drop again.

However, such setbacks would only be temporary in nature. The long-term prognosis for each of these companies is good, with minimal risk. These 2016 forecasts confirm that thesis for the foreseeable future. It's unlikely one will far outperform or underperform the others. You can feel relatively safe having them as part of your portfolio.

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Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$63.54 (-0.20%) $0.13
3M Company Stock Quote
3M Company
$128.49 (-0.71%) $0.92
Honeywell International Inc. Stock Quote
Honeywell International Inc.
$175.11 (0.75%) $1.30
Halliburton Company Stock Quote
Halliburton Company
$31.43 (0.22%) $0.07
Synchrony Financial Stock Quote
Synchrony Financial
$28.59 (3.51%) $0.97

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

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