Honeywell: The Pivot Appears To Be Working
Summary
- Honeywell reported better-than-expected Q4 2018 results and its management team raised their fiscal 2019 guidance.
- Management's recent pivot - i.e., asset spinoffs and restructuring efforts - is already paying dividends but, more importantly, Honeywell appears to be well-positioned for 2019 and beyond.
- I am long Honeywell and I plan to stay long for the foreseeable future.
- This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »
Honeywell (NASDAQ:HON) ended 2018 with a bang. The industrial conglomerate reported Q4 2018 financial results that beat the top and bottom line estimates, and its management team raised their fiscal 2019 guidance. The stock has been on an upward trend since the start of 2019, which was helped by the Q4 beat and raise, but HON shares are still underperforming the broader market over the last year.
Data by YCharts
However, as I have consistently described over the last few years, I believe that the pullbacks in HON shares should be viewed as long-term buying opportunities. Moreover, in my opinion, the company's Q4 and full-year 2018 results show that the long-term bullish thesis remains intact, even after factoring in the recent pivot (i.e., restructuring efforts and asset spins).
The Latest, The Pivot Appears To Be Working
On February 1, 2019, Honeywell reported adjusted EPS of $1.91 (vs. the estimate of $1.89) on revenue of $9.73B (vs estimate of $9.70), which compares favorably to the year-ago results (excluding the spinoff impact).
Source: Q4 and Full-year 2018 Earnings Presentation
As shown, Honeywell's quarterly results were strong across the board. Organic sales were up 6% YoY, which was primarily a result of strength seen in aerospace (commercial and U.S. defense) and warehouse automation (a key growth driver for this company). Additionally, Honeywell's adjusted EPS were higher YoY (excluding spin impact) and, importantly, the company continued the long streak of improving its cash conversion.
However, as I previously described here, I believe that Honeywell's margins are the real story for this industrial conglomerate (and its stock), so it is encouraging that the most recent results showed further progress toward management's goal of eliminating unnecessary costs and expanding margins for each of its operating segments.
Source: Q4 and Full-year 2018 Earnings Presentation
It is important to also note that 2018 turned out to be an extremely eventful year for Honeywell, which make the full-year results that much better. 
Source: Q4 and Full-year 2018 Earnings Presentation
There is a lot to like about Honeywell's most recent operating results but, looking ahead, it is hard not to be bullish about Honeywell's business prospects, especially after factoring in the 2019 guidance.
Source: Q4 and Full-year 2018 Earnings Presentation
At the end of the day, the 2019 guidance shows just how better positioned management believes the 'new' Honeywell will be. The 'smaller is better' theme flowed throughout the earnings material and conference call, which makes sense as management prepares for life after Garrett Motion (GTX) and Resideo (REZI).
To this point, Honeywell looks to be well-positioned for 2019 and beyond as its management team appears to be laser-focused on further pivoting this global conglomerate, while also deploying capital in a manner that will benefit its shareholders for years to come.
Source: Q4 and Full-year 2018 Earnings Presentation
The main (and overarching) reason why management spun off GTX and REZI was to focus on the businesses that they considered core. So far, the pivot appears to be working as shown by the fact that 2018 played out better than what management originally anticipated (2018 guidance was raised 4 times over the last 4 quarters) and 2019 is projected to be another stellar fiscal year.
It also helps the bull case that Honeywell shares are trading at what I would consider to be an attractive valuation.
Valuation
Honeywell's stock is trading at 18x forward earnings, which makes the stock appear to be richly valued based on today's price.
Data by YCharts
However, Honeywell is a best-of-breed company in the industrial space, in my opinion, so it makes sense that the conglomerate is trading at a slight premium. Additionally, HON shares are trading below the average P/E ratio based on its own historical metrics.
Data by YCharts
I have a 12 to 18-month price target of $175 per share; so, in my opinion, HON shares are attractively valued at today's level.
Risks
A global recession is the most significant risk to my investment thesis, at least in the near term. I do not believe that a recession is not likely to happen over the next 12 months, but if one were to materialize, Honeywell's businesses would be negatively impacted in a major way. Furthermore, investor sentiment is extremely bullish for Honeywell at this point in time and it largely revolves around the prospects for the aerospace division, so a slowdown in this industry would likely result in shares selling off.
Additionally, Honeywell previously disclosed that the SEC opened an investigation into its accounting for asbestos-related liabilities. Management recently increased its estimate for the potential liabilities for these liabilities, so the SEC is looking into the previously communicated (and booked) estimated charges. I view this as noise, but obviously, it is never good when the SEC comes knocking.
Bottom Line
I believe that Honeywell's Q4 and full-year 2018 operating results show that this company's long-term bull story remains intact. This industrial conglomerate has great businesses in industries that have promising long-term prospects. Moreover, Honeywell appears to have the right management in place and its focus on software (i.e. Industrial Internet of Things) is already paying huge dividends. Lastly, the recent spinoffs helped management create a more focused and streamlined company which, in my opinion, should allow for Honeywell to continue to benefit from strong tailwinds in several key markets (e.g., aerospace is the most notable example).
2019 should be a big (and meaningful) year for Honeywell so investors should closely monitor the company's operating results over the next 4 quarters. If management's 2019 guidance is achieved, Honeywell's stock will likely be a market beater over the next 12-18 months. As such, investors with a time horizon longer than 1 year should treat HON pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.
Author's Note: I hold a sizable Honeywell position in the R.I.P. portfolio and I have no plans to sell any shares in the near future.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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Disclosure: I am/we are long HON, REZI, GTX, GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.