Sunday, January 31, 2016

Earning Analysis: Honeywell (HON)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Honeywell announced their fourth quarter and full year earnings estimates for 2015.  Earnings of $1.58 on sales of $9.98B was perfectly in line with expectations.  The company ended the year earning $6.10 and returned $10B in cash to shareholders through dividends, share buybacks, and mostly (not to mention most importantly) mergers and acquisitions. Free cash flow also increased by 10%, which was more than the management team expected.  Margins also increased by over 2% on the year, which is rather impressive at this point.  You'd have to believe we're reaching a point where those margin gains are reaching the most optimum point, but they still expect margin gains next year.  

The one thing I said had to be watched for was organic growth.  As I expected, we didn't see anything near 3% organic growth marks.  Organic growth for the company was flat for the quarter and only about 1% on the year.  A lot of this has to do with the impacts they saw from the Performance Materials and Technologies businesses.  They were impacted heavily by the slow down in the oil patch and that certainly kept things down.  Conversely, the Aerospace businesses showed strong growth and also gave strong guidance.  The businesses are seeing a lot of demand for their various flight and cockpit components/software, and the pleasantly surprising notes were related to the strength in their automotive (Turbo) business.  They own 40% of the market share for the product and they're growing faster than the space itself is, which means they're also taking share.  This is positive and impressive to hear.

The things to watch out for tend to lay with the overall economy.  If the oil patches improve, Honeywell's PMT  businesses are likely to improve.  If things get bad, Aerospace may slow down and take things downwards.  I also think the Presidential elections have some potential impact from a defense perspective.  Money spent this year is pretty much already allocated, but depending on what candidates say and want, it's possible longer term impacts could exist should someone say they want to spend more or less on the military.  China hasn't seemed to have been an impact to the company despite what has happened to their stock market, so any changes there should be minimal.  

Earnings and sales estimates have not changed since the December forecast meeting and right now I don't see any reason to change my projections.  I continue to expect earnings to hit $6.55.  10% growth would put them at $6.71, but current market conditions warrant some caution.  Should they navigate things well early on, the estimates will get raised, as is often the case.  The interesting piece is that this down market is creating some potential acquisition opportunities.  We'll just have to see if the right price shows up and things move.