Honeywell Earnings Preview: Aerospace Decline Will Likely Offset ACS Growth
Honeywell International (NYSE:HON) is set to announce its fourth quarter and annual results on January 23, 2015. We expect to see flattish revenue in the fourth quarter as gains at Honeywell’s Automation and Control Solutions (ACS) segment are likely to be offset by decline at the Aerospace segment.
In the third quarter, Honeywell posted 5% growth in revenue, to reach $10.1 billion. [1] Honeywell’s ACS and Performance Materials & Technologies (PMT) segments grew in the high single digits, while the Aerospace segment remained flat. However, Aerospace contributed significantly to the improvement in operating margins, which increased 100 basis points to 16.2%.The margin 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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Friction Materials Divestiture To Offset Aerospace Growth
The primary reason behind the decline in Aerospace revenues in the fourth quarter will likely be the divestiture of Honeywell’s Friction Materials business. The Friction Materials business, which accounted for around 18% of Honeywell’s Transportation Systems segment, was divested in July 2014 following the company’s decision to focus on differentiated technologies and businesses that are in line with its long-term plans. The divestiture resulted in flat revenue growth in the third quarter, despite growth in other Aerospace businesses. The impact of divestiture will continue through the second quarter of 2015.
Turbochargers Business To Face Tough Comparables
The growing demand for turbochargers, which serve as an effective solution to increase vehicle performance while reducing fuel consumption and emissions, helped drive sales of Honeywell’s Transportation Systems business in the third quarter. The strong growth in turbocharger sales also considerably offset the impact of Friction Materials business divestiture. We believe that the same trend will likely repeat in the fourth quarter. However, the impact will not be as strong because Transportation Systems revenue is up for a tough comparison on a year-on-year basis. Transportation Systems revenue grew 15% in the fourth quarter last year.
Defense And Space Sales Could Continue To Grow
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. [2] 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.
ACS To Grow On Construction Activity Growth
ACS sales are largely dependent on residential and non-residential construction. Both residential and non-residential construction activity have been growing in the U.S. The Architecture Billings Index (ABI), a leading indicator for nonresidential construction activity in the U.S., was in positive territory for the eighth consecutive month in November. [3] Additionally, housing starts and construction spending in the U.S were up 6.4% and 8.2% year-on-year for the year to date ending November 2014. [4] [5] This will likely help Honeywell’s ACS sales in the fourth quarter.
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- Honeywell’s Q3 10-Q SEC Filing, October 17, 2014, www.sec.gov [↩] [↩]
- An Update to the Budget and Economic Outlook: 2014 to 2024, August 2014, www.cbo.gov [↩]
- AIA Architecture Billings Index, www.aia.org [↩]
- New Residential Construction, December 16, 2014, www.census.gov [↩]
- US Construction Spending Chart, www.ycharts.com [↩]