Honeywell Earnings Preview: Another Quarter With Declining Revenues

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Honeywell

Honeywell International (NYSE:HON) is set to announce its second quarter results on Friday, July 17. Similar to the previous quarter, we expect to see a decline in the company’s top line as a result of foreign currency headwinds, the Friction Materials divestiture, and low crude oil prices. These factors will likely have led to weak performances across all three of Honeywell’s segments – Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies.

In the previous quarter, Honeywell reported a 5% year-on-year decline to reach $9.2 billion, missing market expectations by $270 million. [1] However, on an organic basis, which excludes the aforementioned factors, Honeywell’s revenue grew 2%. The company reported a solid 10% increase in its first quarter earnings per share to reach $1.41, compared to $1.28 in the previous year’s first quarter, beating market expectations of $1.39.

For the full year 2015, Honeywell forecasts a 2-3% year-on-year decrease in revenues. It expects to see an 8-11% increase in earnings per share, or $6.00-6.15, which excludes any mark-to-market pension adjustment. [1]

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See our complete analysis of Honeywell here

Friction Materials Divestiture To Impact Aerospace

The primary reason why we expect to see a decline in Honeywell’s Aerospace revenues in the first quarter is the divestiture of its Friction Materials business. The business accounted for 18% of the company’s annual Transportation Systems’ revenues and 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. Due to its significant contribution to revenues, its divestiture led to a significant negative impact on Aerospace revenues in the past three quarters. Gains from strong aftermarket spares growth, demand for turbochargers and sales related to the Bombardier Challenger 350 and Embraer Legacy 500 were unable to offset the impact from the absence of Friction Materials’ revenues, leading to a 6% decline Honeywell’s first quarter Aerospace revenues. [2]

Low Oil Prices To Impact PMT

Honeywell’s Performance Materials And Technologies (PMT) segment could suffer from the continued decline in oil prices as oil and gas companies continue to delay capital and operational spending in order to maintain profits. Honeywell had earlier expected a lesser impact, but now fears that the impact will present a challenging operational environment for the company. Though only a small part of the segment is tied to the upstream oil and gas industry, a large part is exposed to midstream operations, which is likely to suffer due to the massive drop in rig counts in the U.S. Oil rigs have declined from a peak of 1,609 in October 2014 to 628 in June 2015. [3]

The company will also likely suffer due to the lower prices that resins and chemicals are likely to generate. Prices of resins and chemicals for 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.

Foreign Exchange To Temper Acquisition Based Growth For ACS

We expect to see a decline in Honeywell’s Automation and Control Solutions segment as a result of foreign exchange headwinds. The segment generates 48% of its revenues from outside the U.S., which could face headwinds due to the stronger U.S. dollar. However, this could be partially offset by growth in scanning and mobility companies that Honeywell acquired and consolidated with its ACS segment.

Most recently, Honeywell acquired Datamax-O’Neil, a manufacturer of fixed and mobile printers used in the retail, warehouse and health care industries. [4] The acquisition, which was completed in March, positioned Honeywell to expand into the $1.5 billion global bio-code printing industry. In 2013, Honeywell acquired Intermec, a leading provider of mobile computing equipment, radio frequency identification (RFID) scanners and tags, bar code scanners, and printers. With the acquisition, Honeywell has been able to significantly increase its market share and revenue in the scanning and mobility industry through Intermec’s vast product line.

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Notes:
  1. Honeywell’s First Quarter 2015 Financial Release, April 17, 2015, www.honeywell.com [] []
  2. []
  3. U.S. Rig Count, Baker Hughes []
  4. Honeywell Completes Acquisition Of Datamax-O’Neil, March 2, 2015, www.honeywell.com []