Megaconglomerate Honeywell (NYSE:HON), maker of everything from programmable thermostats to jet engines, reports its Q3 2006 earnings results tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts follow Honeywell. One says sell, six more hold, and twice their sum say buy it.
  • Revenues. On average, they're looking for 13% sales growth tomorrow, to $7.8 billion.
  • Earnings. They also expect a 14% bump in profits, to $0.63 per share.

What management says:
Reviewing the firm's Q2 results back in July, CEO Dave Cote pronounced himself "confident" in the firm's success this year, highlighting strong organic growth, margin expansion, and the near-doubling of year-to-date free cash flow. (A good chunk of that cash has been spent to buy back 20 million of Honeywell's own shares this year.) Based on the company's achievements so far this year, and its feeling that "end market conditions will remain favorable and macro trends will support our long-term business growth" in the second half, management lifted its full-year earnings guidance to a range of $2.48 to $2.53 per share.

What management does:
If Honeywell makes the numbers that Wall Street is projecting for it for tomorrow, it will be well on its way to achieving that raised guidance. That 13% sales growth would top the 12% the firm has posted year to date. And as you can see below, Cote wasn't kidding when he said that margins are expanding. The rolling gross, operating, and net margins have all been on an uptrend for more than a year now.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

22.4

22.8

23.1

23.3

23.7

24.2

Op.

9.9

10.2

10.3

10.5

10.8

11.1

Net

5.2

4.8

5.1

6.0

6.1

6.7
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
What could throw a monkey wrench in the plan? Only the company itself, it seems. As I already mentioned, so far this year, sales are up 12%. Better yet, the cost of goods sold has risen only 10% -- expanding the gross and leaving room for increasing margins farther down the income statement. Unfortunately, however, Honeywell hasn't used that room to its full potential. Its selling, general, and administrative (SG&A) expenses are up 14%, outpacing sales growth and diminishing the operating and net margins from where they might have been, had the firm held the line on operating costs. The cost of expensing stock options, which Honeywell began doing this year, isn't a serious threat to operating margins, but it's nonetheless taking a small toll.

In tomorrow's news, I'd like to see that the company has recognized this problem and is working to bring its operating costs growth back down to no more than the rate of sales growth. If so, this firm can indeed live up to the full potential that Cote sees in his "market conditions" and "macro trends."

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.