Honeywell’s Revenues Grow On ACS And Margins Due To Aerospace

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Honeywell

Honeywell International (NYSE:HON) reported its third quarter 2014 results on October 17, 2014, posting 5% growth in revenue, to reach $10.1 billion. [1] Honeywell’s Automation & Control Solutions and Performance Materials & Technologies segments grew in the high single digits, whereas, the Aerospace segment  remained flat. However, Aerospace contributed significantly to the improvement in operating margins, which increased 100 basis points, to 16.2%.

The margins improvements, driven by higher volumes and productivity, helped increase net profits by 14%. Earnings per share increased 19% for the quarter. Given the strong performance in the third quarter, Honeywell revised its earnings per share guidance upwards $5.50 – $5.55, from $5.45 – $5.55.

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Automation & Control Solutions grows on Intermec

Honeywell’s acquisition of Intermec has had a significant impact on its Automation & Control Solutions segment. In the third quarter, the segment’s revenue grew 9%, to reach $3.67 billion, of which 5% came from Intermec. [1] Even in the second quarter, most of the 10% growth in revenue came from the acquisition. We believe that sales of Honeywell and Intermec’s data capturing products such as radio frequency identification (RFID) and barcode scanners and tags should continue to drive growth in the segment’s revenue. Sales of Honeywell’s heating, ventilation and air conditioning (HVAC), ssafety and security products should also contribute to growth.

  • The demand for RFID and barcode scanners and tags has been growing due to the demand for efficient means of data collection. RFID and barcode technologies are being increasingly adopted by the retail industry for tagging clothes and keeping account of sales and inventory. These trends are expected to drive growth in the global Automatic Data Capture industry at an average rate of 12.29% per year through 2016. [2]
  • Sales of HVAC, safety and security products are the highest in developed countries due to the high disposable incomes and standards of living. However, demand for these products is rising in developing countries as well, primarily due to the increase in urbanization and rising disposable incomes. Development of commercial spaces, such as offices, malls and airports are driving the demand for HVAC, safety and security products. Additionally, with rising per capita income in the developing countries, consumers are looking to spend on products that help make their lives comfortable and safe. This will also help drive demand for HVAC, safety and security products. In order to capture this demand growth, Honeywell has been offering products such as air cleaners, portable masks, water purifiers and packaging material in China that will help protect health and the environment. [3]

Aerospace flat but D&S growth drives positive sentiment

Honeywell’s Aerospace sales have been suffering from the decline in U.S. defense spending. In 2013, Honeywell’s Defense and Space (D&S) sales, which are a part of the Aerospace segment, declined 5% due to a 7.2% decline in U.S. defense outlays due to the impact of sequestration as well as the winding down of the war in Afghanistan. [4] The first and second quarter 2014 D&S sales were down 8% and 1% respectively. However, due to double digit growth in international markets and stabilization in sales to the U.S. Department of Defense (DoD), Honeywell’s D&S sales were up 3% in the third quarter. [1] In the fourth quarter, we expect to see continued growth in the D&S sales driven by international markets. Many countries, other than U.S. and Russia, have been actively voicing their intentions of increasing defense spending. U.S. defense outlays are projected to decline 5% in 2014, which should keep sales to U.S. DoD suppressed.

The primary reason behind Aerospace flat revenues seems to be the divestiture of the Friction Materials business. Friction Materials business, which accounted for around 18% of the Transportation Systems, was divested in July 2014 following a decision to focus on differentiated technologies and on businesses that are in line with its long-term plans. The impact of divestiture will continue till the second quarter of 2015.

The Aerospace segment, though did not contribute to Honeywell’s revenue growth, made a significant impact on Honeywell’s margins. Honeywell’s productivity measures, such as Honeywell Operating System, the synergies between turbochargers and aerospace technologies, and the divestiture of Friction Materials business helped improve Aerospace margins by 150 basis points. The margin improvement is expected to continue in the coming quarters driven by the same trends.

Strong growth in turbochargers sales volume contributed towards offsetting the impact of divestiture of the Friction Materials business. Turbochargers can efficiently deliver an increase in vehicle performance while reducing fuel consumption and emissions, and therefore are an effective solution to the growing demand for fuel efficient vehicles that are compliant with the stringent emissions norms being implemented across the globe. The global turbocharger market is expected to grow at an average rate of 10.12% each year through 2019 driven by the increased use of turbochargers by manufacturers as they try to fulfill the demand for fuel efficient vehicles. [5] Since Honeywell is the leading turbocharger manufacturer in the world, its large market share positions it well to capture a major portion of the growth in the turbocharger industry. However, the fourth quarter 2014 Transportation Systems revenue are up for a tough comparison on a year-on-year basis since revenue grew 15% in the fourth quarter last year.

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Notes:
  1. Honeywell’s Q3 10-Q SEC Filing, October 17, 2014, www.sec.gov [] [] []
  2. Global Automatic Data Capture Market 2012-2016, October 15 2013, www.technavio.com []
  3. Morgan Stanley China Industrials Summit Presentation, June 18, 2014, www.honeywell.com []
  4. An Update to the Budget and Economic Outlook: 2014 to 2024, August 2014, www.cbo.gov []
  5. Turbocharger Market by Vehicle Type, Fuel Type, Technology & Region- Industry Trends & Forecasts to 2019, August 25, 2014, www.marketwatch.com []