Honeywell International (HON) had a great first quarter but I saw other signs that the rest of the year may not see the stock grow as much as it has. Great productivity and earnings are attributed to the company's ability to cut costs and streamline, not growth. In fact, the company has lowered its sales projections for the year. Eventually, lower revenue is going to catch up with the price of the stock and it's going to have to pull back and I see that happening in 2013. Let's take a look at how productive this company is right now and I'll share with you my ideas of investing in this stock.
Credit Suisse continued to give a neutral rating to Honeywell International despite glowing estimates of future performance. This may be due to the stock's incredible success since it has grown from about $61 up to $75 since mid-December. That is a respectable growth rate of about 22.9%! Honeywell's repositioning costs dropped quite a bit in 2012, while the first quarter saw its EBIT up 10% year-over-year even though sales had flat-lined. (If you are unfamiliar with EBIT, it stands for: earnings before interest and taxes) So the company is doing a great job managing its cost-out activities! Its repositioning costs were also up year-over-year which means that when the company sees organic growth accelerate, operational leveraging should look really good.
When the company reported for the first quarter of 2013 and showed an earnings increase that totaled $966 million over 825 million the year before, it showed how well its cost-cutting measures have been working. It put together a substantial earnings increase while sales remained flat since the company continues to face macroeconomic headwinds. Every segment except "Performance Materials" and "Technologies" reported decline in sales. Look at the performance of some of these sectors:
- Aerospace segment - Sales dipped 1% year-over-year to $2.91 billion but margins are up 18.9%.
- Automation and Control Solutions - Segment sales were flat year-over-year but profits surged 7% as margins expanded to 21.8%.
- Transportation Systems - Segment revenue of $914 million for the quarter declined 4%, but profits were down 8% and margins came in at about 12.1% which is lower than the previous year.
- Performance Materials and Technologies - Segment sales increased 6% and profitability rose by 17% as margins also increased.
One can observe that management is doing something right in its cost-cutting measures to make the company more streamlined and profitable. Nowhere better can this be seen than in the company's cash flow that improved considerably to $341 million compared to $196 million a year ago - and that is with flat sales.
Despite the good first-quarter report, I would be a little cautious if I was a growth investor at this point. If I am looking at Honeywell as an investment, I might have missed the opportunity and will need to watch the company for a better entry point than where it sits presently. After the 22.9% growth, I believe we might see a pullback for period of time. The company may have slightly raised its earnings guidance for 2013, but it has also reduced its sales guidance for the year. This means the company is expecting sales to remain flat and this could have an adverse affect upon the stock's future performance of this year.
Declining industrial activity in both the United States and Europe has affected large conglomerates like Honeywell and General Electric (GE). In fact, factory activity grew at its slowest rate in three months in March but Honeywell continues to outperform its peers. Consolidating business and focusing on improving productivity across all four divisions has helped the company, but also has the decline in the cost of raw materials. And the company expects to continue the success with plans to expand its gross margins by up to 18% by 2014.
For future growth, Honeywell is looking to China even though it had a weak start in the beginning of the year. Even though Europe and the United States remain flat, order rates are improving in China and its long cycle businesses and this usually signals a consistent but mild recovery through the rest of the year.
Honeywell has had a great run in the first quarter of 2013 but I am observing what looks like a potential slowdown in the stock. This last pullback that pushed through the bottom Bollinger band but also the 50-day moving average was the largest pullback since the end of November 2012. I see a long negative divergence in the RSI indicator which continues to show weakness in the present move of the stock and the last two times the stock tried to push through the $75 level, it failed and pulled back. In order to confirm a slowdown and a stronger pullback, I would need to see the MACD indicator drop below the zero line which identifies the strength of the momentum for me. The last drop just touched the zero line and has since moved up and I want to see it drop through the zero line to confirm that the stock is about to turn around.