Honeywell (HON) shares faced a decline on Thursday following the release of their third-quarter results, which were deemed disappointing by investors. The industrial conglomerate managed to exceed expectations in terms of earnings and cash flow, albeit only slightly. However, the overall outlook for the remainder of the year did not offer much to spark enthusiasm.
In terms of revenue, Honeywell reported a 2% year-over-year increase organically, reaching $9.21 billion. Despite this growth, it fell short of analysts’ expectations of $9.23 billion. Similarly, adjusted earnings-per-share rose by 1% annually, reaching $2.27, surpassing the consensus forecast of $2.23. The segment margin, which can be seen as an adjusted operating income margin, showed an increase of approximately 80 basis points to 22.6%, slightly missing the mark but still within the high-end range of management’s guidance.
Unfortunately, Honeywell’s stock hit a 52-week low during a challenging market session on Thursday. Year-to-date, the stock has experienced a nearly 18% drop, while the S&P 500 Industrials Sector has only seen a 1% decline in the same period.
There was a glimmer of hope, though, as Honeywell’s aerospace segment outperformed expectations with double-digit organic growth in both commercial aviation and defense and space. However, aside from this positive development and slightly better-than-expected cash flow, the overall numbers were not particularly inspiring.
Looking ahead, Honeywell’s guidance for the remainder of the year appeared mixed. Sales are expected to fare better than initially anticipated, but earnings and free cash flow forecasts fell slightly short at the midpoint, although they still fell within expectations. It’s worth noting that Honeywell has a tendency to report results on the higher end of their provided ranges. Thus, despite the current quarter’s underwhelming performance, analysts believe that there is an opportunity to capitalize on the company’s stock, given the improvement of end market dynamics as we head into 2024.
One positive indicator lies in Honeywell’s backlog, which reached a new record, showing an 8% annual growth (3% sequentially) to $31.4 billion. Management stated that orders are “reaccelerating as demand generation improves” and that “demand continues to outpace output in Aero.” Notably, the segment margin saw an expansion of nearly 80 basis points, and this trend is expected to persist as improvements in the sales mix and supply chain contribute to converting the backlog into actual sales. Furthermore, there are signs that demand in key areas is starting to stabilize, although the exact timing of a market shift remains uncertain.
To further instill confidence in investors and indicate positive developments, Honeywell ramped up its buyback activity during the quarter. The company repurchased 5.3 million shares, which is more than double the amount acquired in the previous quarter. Management attributed this decision to the stock’s highly attractive valuation and their ongoing confidence in Honeywell’s performance. As a result, analysts are reiterating a rating of “1” for the stock, but have revised the price target to $210 per share from $225, representing about 21 times the estimated earnings for 2024. This valuation aligns with the average multiple observed over the past five years.
Examining the quarterly performance, the highlight was the better-than-expected sales in the aerospace sector, reaching approximately $3.5 billion. Honeywell experienced double-digit growth in both commercial aviation and defense and space, making it the strongest growth quarter for Aero in over a decade. Furthermore, Performance Materials and Technologies sales reached $2.87 billion, largely driven by the growth of process solutions. Honeywell Building Technologies achieved 4% annual organic growth in building solutions, while product sales experienced a 3% decline. Safety And Productivity Solutions faced challenges, with sales dropping nearly 30% to $190 million due to lower volumes in warehouse and workflow solutions, as well as productivity solutions and services sub-segments.
As for guidance, the full-year outlook slightly decreased at the midpoint for sales and organic growth, slightly increased for the segment margin, and remained unchanged for earnings and free cash flow. It’s important to note that pension liabilities are expected to suppress earnings performance by 14 cents per share in the fourth quarter and 55 cents per share for the full year. Despite falling short at midpoints for earnings and free cash flow, analysts still believe that these targets can be achieved or even surpassed, given Honeywell’s history of reporting results near the higher end of their provided ranges.
Looking ahead to 2024, Honeywell is optimistic about continued improvement in fundamentals. Key factors driving this optimism include fleet growth and replenishment in the aerospace sector, automation and infrastructure investments contributing to market dynamics, the ongoing energy transition, and the strength of digitization. Additionally, the company has a “robust M&A pipeline” and has highlighted this as a focus area for capital deployment. Furthermore, stakeholders are eagerly awaiting the reorganization plans of Honeywell’s new CEO, Vimal Kapur, which will be implemented at the beginning of the first quarter of 2024. The revised segments will be Aerospace Technologies, Industrial Automation, and Building Automation.
In conclusion, Honeywell’s third-quarter results were met with disappointment, but there are indicators of improvement in various segments, especially the aerospace sector. While the stock has faced a decline, analysts believe there is an opportunity for growth given the company’s favorable valuation and improving market dynamics. The company’s optimistic outlook for 2024 further supports this belief, with continued focus on growth, margin expansion, and cash growth.
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