Monday, January 30, 2017

Earnings 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.

Back on Friday, Honeywell announced their fourth quarter and fiscal year results for 2016.  It was also the last conference call led by outgoing  CEO Dave Cote.  Cote, who has been at the helm for over 15 years, left on what I feel was relatively on a muted note in terms of results, but left under the usual jovial attitude with analysts.  Focusing on the company, fourth quarter earnings came in at $1.74 and sales were $10B.  This was generally in-line with expectations, though sales were slightly under expectations of $10.15B.  That said, the company was able to beat on organic growth, keeping it at down 1% instead of the anticipated down 2%.  Guidance stayed in line with the story provided back during the December outlook discussion.  Earnings are expected to be in the range of $6.85 - $7.10 which is a 6% to 10% increase from 2016 earnings of $6.60.  They also expect there to be organic sales growth of 1% to 3%, though from what they showcased, much of the growth is expected in the second half of the year.  All in all, though, the path appears to be set and things seem to be well on their way down the desired path.  

The transition to new CEO Darius Adamczyk appears to be well organized.  He'll be presenting with Dave in the next shareholder meeting in March and he spoke to a number of points in today's conference call.  This does help set me at some ease, as the changeover to a new CEO is typically a time to cut an run from a stock until you get a feel for the new CEO and what their plan is.  I find this transition going similarly to the transition we saw at Home Depot, which despite this being the second transition in my portfolio, is truly rare.  In fact, I get the feeling the plan we see in motion now, has a lot of Darius' fingerprints on it.  If I'm correct, the concerns that might go with the transition may be a moot point.  Other risks that still exist are political risk as well as the fact that they're an international company and things like a strong dollar can impact results.  The company has hedged against dollar valuation risk, but it won't cover everything.  Currently, they also appear to be generally safe from the political risk factor, but the truth is that anyone could come under fire at any time - especially when similar companies like Boeing and United Technologies have already been in the line of fire.  

Wrapping things up here, nothing earth shattering really came out of this conference call.  I feel a little more confident in the transition, but there are still some risks to keep an eye out for.  I leave my earnings target at the high end of provided estimates of $7.10 and a price target of $128.  I also leave the stock ranked at a 2.  If political risk or other factors create a market wide selloff, I believe the stock will be an opportunity to buy in the $111 to $115 range.

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.