Sunday, January 29, 2012

Honeywell Q4 Report analysis

This week I'm going to cover the earnings call for Honeywell (HON).  They reported 4Q and fiscal year 2011 numbers as well as guidance for 2012 on Friday.  While I was at my real job seeing headlines, you'd swear Honeywell reported something unfavorable.  Surprisingly, based on the headlines alone, the stock was up throughout the majority of the day, though.  I looked forward to hearing what all was said on the call because it's been noted in other teachings that headlines can be misleading.  My findings?  This quarter, and the full year, was nothing less than stellar in my opinion.

Headlines stated that Honeywell reported a net loss in the fourth quarter.  This is actually true, but that loss is only after a large sum was taken out for pension funding.  Honeywell's numbers are truly based on a proforma (before pension funding) basis and they earned $1.05 per share.  This was the very top end of estimate as was their fiscal year numbers, which was 4.05 per share.  Not only did they almost beat their best estimates, but 2 other things should be considered: 1)These estimates were revised half-way through the year.  That's right, a year ago they thought the best they could do was $3.80 on the year, not they almost beat revised guidance of 4.05. 2) They had a 1% headwind in the fourth quarter due to foreign exchange costs.  If you take this into consideration, they may have actually beaten guidance by a penny or two.  This equates to a 35% gain in earnings compared to the prior year!  All other key numbers were impressive as well - Sales up 13% (8% organic) margins were up 19%, however, free cash flow did decrease.  There were a lot of positives to take away from the call for the past results and you heard a few analysts give kudos on the results, which is a rather ethereal positive indicator.

Anyone that knows much about stocks knows it's not so much about what has happened, but rather what's coming in the future, though.  When it comes to conference calls, Honeywell is one of the favorites I have right now.  They do a spectacular job of giving guidance and breaking it all down for you.  It helps make for great visibility and makes it easy to compare past guidance with current results.  When it comes to 2012 earnings, there was clearly a sense of conservatism in the tone.  3Q and 4Q 2011 was showing some down trends in selective short-cycle businesses - particularly due to EU impacts as well as China's GDP slowing.  These trends are expected to continue at least through the first half of the year, however, long cycles - particularly in commercial airlines are improving vastly and are expected to cover these down trends.  Something to note about the 2012 year - as Boeing goes with the new 787 air bus, so will Honeywell's aerospace division.  This is expected to be a big production year for Boeing and if so, Honeywell will have strong growth here as they are a supplier of components that make the 787.  For the year as a whole, Honeywell expects to grow earnings - even through tough economical times, however, guidance is very conservative at 5-10% for EPS growth- much lower than the performance of this year.  Truth be told, I think the company might be guiding a little overly conservatively, but I prefer that over setting hopes too high.

So what would I do with this stock?  For my own protfolio, I stand by what I said a couple weeks ago.  I already sold a little and it doesn't make a lot of sense to buy more for higher than what I've sold for, so I'll be waiting for a huge pull back before I would snatch up more shares.  As it stands, selling what I did balanced my portfolio nicely anyway and I have decent cash reserves to work with if the market does correct.  That being said, if I was funneling more money into my portfolio or Honeywell was under balanced, I'd have to seriously consider buying more despite my selling some.  Based on FY11 results this stock is trading at 14.4 times past earnings and 13.5 times a conservative forward earnings guidance.  For now, I think it's fair to use the guidance Honeywell gave and assume they can hit the mid-point.  Based on past growth trends, as well as future growth guidance and the company's quality, I think it's fair to estimate a PE of 15.  When you take those factors at this time, I have a price target of 65 for Honeywell, which is 11.5% upside potential.  Truth be told, I think I'm being conservative, just as the company is.  However, when there is as much uncertainty in the markets due to macro and government factors as there is today, it is prudent to be that way.

Thoughts or constructive comments?  I'd love to hear them!  The only way I can get better is with your help and if I get better at this, maybe I'll be able to provide valuable information for you or other individual investors in the future.  Thanks!