Honeywell Earnings Preview: Results to Reflect Currency Headwinds, Varied Drivers, and Major Divestiture

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Honeywell International (NYSE:HON) is set to announce its third quarter results on October 16, 2015. We expect Honeywell’s total sales to remain flat or dip slightly from the reported $9.8 billion in the second quarter. [1] The Aerospace and ACS (Automation and Control Solutions) segments are expected to remain somewhat flat, while the Performance Materials and Technologies segment is expected to dip by 7.0% – 9.0% year over year. [2]  The aerospace segment is expected to post lower  sales due to the Friction materials divestiture executed in July 2014 and the unfavorable impact of foreign currency in transportation systems.

Aerospace Segment to Remain Flat Through 2015

Absent the impact of the Friction Materials divestiture of July 2014, results of the Aerospace segments were in line with guidance. The business had accounted for 18.0% of the  segment. Since we have passed the anniversary of this divestiture, it will no longer factor into year-to-year comparisons.

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The factors likely to affect an upside in the segment sales are:

Volume Growth in Turbochargers BusinessThe turbochargers business has seen revenue and volume growth as a result of growing demand. This helped drive Honeywell’s Transportation Systems revenue in the second quarter by 5.0% on a core organic basis. This was primarily impacted by new platform launches and higher gas turbo penetration globally. On reported basis, the segment sales were down 25.0% as a result of the Friction Materials divestiture and impact of foreign currency.

Defense and Space Sales Expected to GrowThe Defense and Space segment commands almost one third (contributing 30.8%) of the total aerospace segment sales. The segment sales remained flat (up 1.0% year over year) in the second quarter, driven by growth in international programs, offset by lower US government spending. We expect sales from defense and space to stabilize and gradually grow following growth in international markets. The total US National Security spending is also expected to marginally increase by 4.3% in 2015. [3]

Business and General Aviation Engine DeliveriesThe Commercial Original Equipment sales increased by 6.0% in the second quarter, driven by higher business and general aviation engine shipments. Airbus forecasts the global aircraft fleet to nearly double to around 32,600 aircrafts by 2034. [4] We expect growth and expansion of fleet and higher passenger volumes in the aviation industry to drive healthy growth of the BGA business in the longer term.

Building Solutions and Distribution Volume to Drive ACS Growth

ACS sales are largely dependent on construction activity, which has seen good growth in the US. Spending on construction projects in the US at the fastest rate in more than seven years, driven by home building and government projects. Construction spending in July 2015 rose to a seasonally adjusted annual level of $1.1 trillion, the highest since May 2008. Private non-residential construction also advanced at 0.2% in the same period, while home construction witnessed  growth of 1.3%. [5] Net sales in the building solutions and distribution segment decreased by 4.0% in the second quarter principally due to the impact of foreign currencies, offset by increased sales volume in the segment. Given the growth in the industry, the sentiment for the segment in the long term is expected to be positive.

Performance Materials and Technologies to Continue Downward Trend

The segment sales slumped by a 9.1% year over year in the second quarter 2015, contributed by UOP (Universal Oil Products, 10.0%), Process Solutions (13.0%), and Advanced Materials (6.0%). UOP sales are expected to a show negative trend as a result of lower engineering and gas processing revenues due to delays in customer projects. Process Solutions sales are also expected to decline as a result of lower volumes due to delays in customer projects. The advanced materials sales are expected to decrease on the back of continued unfavorable pricing primarily in resins and chemicals where sales fluctuate with the market price of raw materials correlated to the price of oil, which is expected to remain weak. As a result of these factors, the segment sales are expected to decline by 7.0%-9.0% year over year.

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Notes:
  1. Honeywell’s 2Q Financial Release, October 17, 2015, www.honeywell.com []
  2. Honeywell Q2 2015 Earnings Conference Call, July 17, 2015, www.honeywell.com []
  3. US National Security Spending, 2014-2015, March 13, 2014, www.pogo.org []
  4. Airbus Global Market Forecast, 2015-2034, www.airbus.com []
  5. US Construction Spending, September 1, 2015, www.reuters.com []