Earnings Analysis: Honeywell (HON)

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 second quarter earnings results on Friday, posting earnings of $1.66 on sales of $10B.  Earnings were a slight beat on analyst expectations of $1.64 while the sales were slightly under the expectations of $10.13B.  Additionally, the company also raised the lower end of guidance for 2016 to $6.60 and lowered their outlook on sales by about $300M.  Expected earnings now has a range of $6.60 to $6.70 while the sales range is now $40B to $40.3B.  The mixed results were reflected by the stock dropping over 2.5% on trading during the day, though the stock was down close to twice that at one point.  Analysts were expecting out performance as provided by the company's consistency in beating expectations and what we got was a small chink in the armor that is Honeywell.  

How bad is that chink, really, though?  The downward revision in sales is approximately 300 million on a basis of over 40 billion.  That's a less than 1% guide down and the cause of the guide down appears to be coming primarily from the aerospace division where they were seeing government contract delays, much lower helicopter demand from the Oil and Gas industry, and a slowdown in the business jet division.  Additionally, this impact has been created by incentive programs that flatten as we move into 2017 and then decrease after that.  Let's also not leave out the fact that other companies in the industry are reporting a similar kind of feedback regarding the subdued performance - meaning this is not a matter of poor execution.  In contrast, the company is raising earnings guidance, speaking to how well the company is performing on their segment margins as well as how quickly they're responding to market conditions, as layoffs in the aerospace division were reported a couple days before the earnings announcement.  When questioned on the low organic growth, the response was that this was exactly within the guidance provided back in December and that nothing has strayed from that.  They also stated that the base for 5% core organic growth in 2017 still exists, though there are more macro items which need to be watched to see if there will be an impact.  In all, I find the downward guidance slightly disappointing at best.  The long term path still appears to be on course, which should help set up for a successful transition to a new CEO as we go into March of next year.  While I'm disappointed to see Dave leave, I trust in him and his management team to assure the right knowledge and experience is in place to keep things moving forward.

All of the information presented is forcing me to adjust my targets on the stock.  Despite the somber feel after Friday's announcement, I'm actually guiding up at this time.  I'm raising my earnings target for 2016 from $6.55 to $6.65.  I also believe the consistency and reliability of the stock deserves a multiple of 18 times earnings.  This leaves me with a 2016 price target of $120.  Looking out to 2017, I'm conservatively estimating earnings growth of 8% (which is lower than the 10% growth we've been seeing the last couple years), leaving a earnings target of $7.18.  That same 18 multiple gives us a 2017 target of $129.
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