Honeywell Earnings Preview: Revenues Likely To Be Weak

Honeywell International (NYSE:HON) is set to announce its first quarter results on Friday, April 17. We expect to see a decline in the company’s first quarter revenues as a result of a weak performance across all three of its segments – Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies. The strong dollar likely also impacted the company’s results.

In the fourth quarter, Honeywell reported a 1% year-on-year decline in its revenue as a result of Friction Materials divestiture, original equipment manufacturer (OEM) incentives and currency headwinds. ^[1] Honeywell reported a sluggish 1% increase in its fourth quarter earnings per share to reach $1.20. However, excluding mark-to-market pension adjustments, earnings per share grew 15% to $1.43, beating expectations of $1.42. On the revenue front as well, Honeywell beat analyst expectations of $10.21 billion by $60 million.

For the full year 2015, Honeywell forecasts a 1-2% year-on-year increase in revenues and 7-11% increase in net profits, assuming a tax rate of 26.5%. ^[1] Its earnings per share guidance is of $5.95-6.15, which excludes any mark-to-market pension adjustment.

See our complete analysis of Honeywell here

Friction Materials Divestiture To Offset Aerospace Growth

The divestiture of Honeywell’s Friction Materials business will be the primary reason behind the decline in Aerospace revenues in the first quarter. 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 a 6% decline in Aerospace’s fourth quarter revenue, offsetting gains from strong aftermarket spares growth, demand for turbochargers and sales related to the Bombardier Challenger 350 and Embraer Legacy 500.

We expect to see continued growth in aftermarket spares as a result of rising air travel. Aircrafts have had to endure more wear and tear due to an increase in flying hours, raising the need for maintenance and repairs. For Honeywell’s Aerospace segment, this should translate into higher sales of aftermarket components and maintenance, repair and overhaul (MRO) services. Sales of aftermarket equipment have also benefited from aircrafts being regularly upgraded with latest equipment so that they remain efficient.

Honeywell’s Aerospace organic sales should benefit from the growing demand for turbochargers. Turbochargers can efficiently deliver an increase in vehicle performance while reducing fuel consumption and emissions. Therefore they are an effective solution to the growing demand for fuel efficient vehicles that are compliant with the stringent emissions standards being implemented across the globe. Honeywell’s turbochargers can be found on automobiles manufactured by major manufacturers such as BMW, Audi, Volkswagen, Chevrolet, Ford and Mercedes. Most recently, Honeywell announced that its turbochargers will be included in the new Volkswagen and Skoda vehicles in India. ^[2]

Weak Construction Activity To Impact ACS

ACS sales are largely dependent on residential and non-residential construction because new residential and commercial buildings are likely to use safety and security, and sensing and control products in order to create a safe and comfortable environment and adhere to safety regulations. Both residential and non-residential construction activity have been somewhat weak in the first two months of the quarter, which could lead to sluggish sales of Honeywell’s ACS segment.

After having declined to 49.9 in January, the Architecture Billings Index (ABI), an indicator of non-residential construction activity in the U.S., managed to crawl back into positive territory with a weak 50.4 in February. Experts attribute the weakness to the declining oil prices and bad weather. Declining oil prices have impacted jobs in upstream oil-related sectors, leading to a decline in incomes for some parts of the population, while bad weather stalled many construction projects. ^[3] Construction spending in the U.S. was also weak, growing a sluggish 1.7% year-on-year for the two months ended February. ^[4]

On top of the weak growth in construction activity, Honeywell’s ACS will face headwinds from strong dollar exchange rates, which could partially offset gains from sales.

Low Oil Prices To Impact Resin And Chemicals

Honeywell’s PMT segment will likely suffer due to the fewer dollars that resins and chemicals are likely to generate. Price of resins and chemicals of Honeywell’s PMT segment are closely tied to the price of raw materials used, in this case crude oil. Crude oil prices have declined sharply in the past year as a result of high production in the U.S. and unwillingness of the OPEC to cut production. Similar to other segments, the strong U.S. dollar will also present headwinds.

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1. Honeywell’s Fourth Quarter 2014 Financial Release, January 23, 2015, www.honeywell.com [↩] [↩]
2. Honeywell Turbochargers to be Included on The New 1.5L TDI Diesel Engine for Volkswagen and Škoda Models in India, April 2, 2015, www.honeywell.com [↩]
3. AIA Architecture Billings Index, www.aia.org [↩]
4. US Construction Spending Chart, www.ycharts.com [↩]