Earnings Analysis: Honeywell (HON)
Honeywell announced their second quarter results on July 21. Results were a solid beat with earnings hitting the high end of guidance at $1.80, beating analyst estimates of $1.78. Sales also beat expectations of $9.98B, coming in at $10.1B. In addition, they handily beat estimates for organic growth registering 3% on what was guided to be a flat to 2% organic growth quarter. This is a nice acceleration in organic growth, which fits the guidance that the company provided 6 months, or so, ago when there was a lot of concern with -2% decline in organic growth, which was fueled by lackluster performance in the aero group - primarily in the private jets and helicopters spaces. Margins, overall, were up 50 basis points and free cash flow is up 39% year to date compared to last year. Finally, they raised guidance on both earnings and sales, with the lower end of the earnings guidance provided raised ten cents to $7.00 while sales edged up to a range of $39.3 - $40B.
Looking a little deeper, the Aero division is still struggling with business jets, but it's in line with expectations. We're finally seeing some decent growth despite this complication, as well, as they posted 2% organic growth. The Housing and Business Tech (HBT) division had solid results, posting 4% organic growth, but this number was troubled a little by a poor product and regional mix that is getting corrected. Performance Materials and Tech had another strong quarter with 6% organic growth, and the Safety and Productivity Solutions group was up only 1% organically, as they dealt with lower margins from previous divestitures and lower sales in productivity parts. None of the headwinds appeared to be an issue or unexpected given the market conditions.
With solid results and increased guidance, it's hard to find any faults with the company. As for the stock itself, I'm a little more perplexed. I reiterate my 2017 earnings target of $7.10, but the multiple I have said the stock deserves in the past was 18. Initially the S&P500 had a multiple of 17. Now it's at 19 (for 2017 earnings expectations, 2018 is at 17). Consistency and earnings growth this strong deserves to be higher. It's hard to figure out if I should be growing my multiple or just getting more cautious or both. This is new territory for me. At this time, I will keep the 18 multiple, but I'm doing more research to determine if my approach needs to change. That will pace a 2017 price target at $128, which we're in excess of already. That said, now that we're over halfway through the year it's time to start looking at 2018. My estimate for earnings then is $7.80, putting the 2018 price target at $140. I will maintain my status of a 2 due to the forward prospects of the company. However, on the shorter term it may be wise to look at selling some gains and preparing for a pullback.
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.
Looking a little deeper, the Aero division is still struggling with business jets, but it's in line with expectations. We're finally seeing some decent growth despite this complication, as well, as they posted 2% organic growth. The Housing and Business Tech (HBT) division had solid results, posting 4% organic growth, but this number was troubled a little by a poor product and regional mix that is getting corrected. Performance Materials and Tech had another strong quarter with 6% organic growth, and the Safety and Productivity Solutions group was up only 1% organically, as they dealt with lower margins from previous divestitures and lower sales in productivity parts. None of the headwinds appeared to be an issue or unexpected given the market conditions.
With solid results and increased guidance, it's hard to find any faults with the company. As for the stock itself, I'm a little more perplexed. I reiterate my 2017 earnings target of $7.10, but the multiple I have said the stock deserves in the past was 18. Initially the S&P500 had a multiple of 17. Now it's at 19 (for 2017 earnings expectations, 2018 is at 17). Consistency and earnings growth this strong deserves to be higher. It's hard to figure out if I should be growing my multiple or just getting more cautious or both. This is new territory for me. At this time, I will keep the 18 multiple, but I'm doing more research to determine if my approach needs to change. That will pace a 2017 price target at $128, which we're in excess of already. That said, now that we're over halfway through the year it's time to start looking at 2018. My estimate for earnings then is $7.80, putting the 2018 price target at $140. I will maintain my status of a 2 due to the forward prospects of the company. However, on the shorter term it may be wise to look at selling some gains and preparing for a pullback.
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.
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.
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