Stock 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.

On Friday, Honeywell shared their 2017 forecast with the investing community.  The truth of the matter is that the results felt mixed.  In fact, initial headlines of the press release was strongly negative.  The company has reiterated their fourth quarter results for 10% earnings growth and a target of $1.74 for the quarter ($6.53 for the year).  While this was within the range, it was at the low end of the range, which is somewhat disappointing.  Additionally, they lowered sales and earnings expectations for 2017.  Reported sales will be down 1%-2% primarily due to divestitures after gains from acquisitions.  Earnings are guided down to a range of $6.85 - $7.10.  The analyst average expectation was $7.08.  

On the earnings, there's a few things to consider.  First, the company is gauging against a strong dollar, which will lower the value of overseas sales.  Second, they're expecting oil prices to stay where they're at or be lower.  Third, there are no tax benefits assumed.  Finally, they're cautious about China, given some of the political rhetoric currently taking place and the fact that the Chinese customer is relatively difficult to gauge.  Essentially the estimates are placed conservatively.  This is normal, as the company tries to reset expectations, particularly since global growth is rather anemic, despite the surge we're seeing in the US.  On top of that, they're preparing for CEO Dave Cote to step down and for Darius Adamczyk to take over.  It's to be expected that during the transition they may temper enthusiasm to better set him up for success.  

Here's the catch, though.  When you look at these industrial conglomerates (including the likes of GE and United Technologies, for example), investors don't measure the company on earnings - at least not purely.  Instead, they're graded on organic sales - or rather new sales created by new/advanced products.  In 2016 all industrial conglomerates struggled here.  Honeywell, in particular, is looking for a 1%-2% organic sales decline for the year.  However, when you look at the organic sales projection for 2017, management is expecting growth of 1%-3%.  That's roughly a 2%+ improvement from this year and not something to overlook.  In addition, what if all of the political rhetoric about lowering business taxes comes true?  Or if the company can manage to repatriate their $8B of cash overseas, at a lower or no tax rate, to be put towards stock buybacks or other investments?  What if oil prices rise - something that's a little more possible with all the OPEC and non OPEC countries agreeing on to cut production to raise prices.  

Essentially, it starts looking more like the company is preparing us for the worst and while it's all possible, I'm not so sure it's likely we're in a worst case scenario environment.  As such, I'm taking the company's guidance and adjusting my 2017 earnings expectations to $7.10.  This may be a little aggressive, as it's above analyst expectations, but I'm going to run with it for now.  Also, given overall economic conditions of the US, I anticipate that the industrial sector may fetch a higher multiple next year so I'm going to raise my multiple estimate for Honeywell to 18.  This places the 2017 price target to $128.  That's about a 10% price increase from where we closed at on December 16.  Given Honeywell's track record over the last 5 years, I don't think that's an unreasonable expectation with what is known today.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.