Honeywell: Strong Third Quarter On Cost Control, But Little Inspiring Outlook

| About: Honeywell International, (HON)
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Shares of Honeywell International, Inc. (HON) were one of the few gainers in Friday's trading session. The diversified technology and manufacturing company announced its third quarter results before the open. Shares of Honeywell rose 1.7% on the day to $62.49.

Third Quarter Results

Honeywell reported third quarter revenues of $9.34 billion, up 0.5% on the year. On average, analysts expected Honeywell to report revenues of $9.50 billion.

The company delivered on strong margin improvements. Segment margins rose by 110 basis points to 15.8%, while operating income margins rose 360 basis points to 13.9%.

Earnings per share from continuing operations rose 38% to $1.20 per diluted share. Earnings beat analysts consensus of $1.14 per share.

CEO and Chairman Dave Cote commented on the results:

"Honeywell delivered 2% organic sales growth, strong sales conversion and higher earnings per share in the third quarter. Our balanced mix of long- and short-cycle businesses, combined with growth in new products and continued expansion in high growth regions, offset European weakness, lower demand for products in some of our short-cycle businesses in China and the US, and foreign exchange headwinds in the quarter."

Segmental Update


Revenues for the aerospace division rose 4% to $3.04 billion. A 9% growth in Commercial end markets, was partially offset by a 1% decline in Defense and Space. Profits for the segment rose 9% to $582 million, as margins improved by 90 basis points to 19.1%, as result of increased productivity.

Automation and Control Systems

Revenues for the automation division were roughly unchanged at $3.96 billion. Volume growth and the favorable impact of acquisitions was offset by unfavorable exchange rates. Segment profits rose 5% to $571 million as productivity increased. This boosted segment margins by 60 basis points to 14.4%.

Performance Materials and Technologies

Revenues for the performance materials and technologies division were up 1% on the year to $1.47 billion. Sales were driven by the Specialty Products and Electronics Materials, offset by challenging conditions for Fluorine Products and Resins and Chemicals. Operating margins were up 130 basis points to 18.6%, resulting in a 8% increase in segment profits to $275 million.

Transportation Systems

Transportation revenues fell 10% on the year to $863 million on the back of unfavorable exchange rate movements, and a weak European light vehicle production volume. Margins compressed by 50 basis points to 12.1%, resulting in a 14% drop in segment profits to $104 million.


For the full year of 2012, Honeywell lowered its full year revenue outlook from $37.8-$38.4 billion to $37.5-$37.7 billion. The mid-point for operating margins was raised by 10 basis points to 13.4-13.6%. Honeywell narrowed its full year earnings per share guidance to $4.45-$4.50 per share.

Dave Cote commented on the future prospects, saying:

"Looking ahead to 2013, we are planning for a continued challenging macro environment, but expect to deliver good growth driven by new products, geographic expansion, and tradition on key initiatives. Further, we will remain flexible and adhere to our disciplined focus on cost and productivity."


Honeywell ended its third quarter with $5.5 billion in cash, equivalents and short-term investments. The company operates with $8.0 billion in short- and long-term debt, for a modest net debt position of $2.5 billion.

For the first nine months of 2012, Honeywell generated revenues of $28.0 billion. The company net earned $2.7 billion, or $3.38 per diluted share.

The market values Honeywell at $49.0 billion. Based on the company's full year outlook, this values the firm at 1.3 times annual revenues, and 14 times annual earnings.

Currently, Honeywell pays a quarterly dividend of $0.3725, for an annual dividend 2.4% per year.

Investment Thesis

Year to date, shares of Honeywell have risen some 15%. Shares rose from $55 in January to highs of $63 in March. From that point in time, shares corrected back to the mid-$50s during the summer months on fears of an economic slowdown. Shares have since recovered and are currently exchanging hands around $62.50.

Over the past five years, shares have been trading largely unchanged. Shares fell from $60 in 2008 to lows of $25 by the end of that year, and gradually recovered to $60 at the moment. Between 2008 and 2012, Honeywell consolidated its annual revenues from $36.6 billion to an expected $37.6 billion this year. Net income rose from $806 million in 2008, to an expected $3.5 billion in 2012.

Honeywell is not overly optimistic for 2013, but certainly works with realistic assumptions. The company warns that China might report the slowest growth rate since 1990, breaking through the 7% growth barrier next year.

Honeywell will cut operating costs by $150 million in 2013 and will introduce new products to keep earnings at its current level. Revenues and earnings might rise slowly if currencies remain stable next year. The strong dollar cost the firm $700 million in annual revenues for 2012. Growth would also be driven by small acquisitions like the $525 million deal with Thomas Russell, announced a few weeks ago.

I think Honeywell trades at a fair valuation, with shares near all-time highs. There are few short-term triggers for the shares, as the company has given but little inspiring update for 2013. Long-term investors with diversified investments could pick up some shares in this industrial conglomerate. Honeywell trades at 14 times earnings and offers a 2.4% yield in the meantime. Don't expect large stock price appreciations in the short to medium term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.