Honeywell Q4 Earnings: 2016 Could See Better Revenues And Earnings As M&As Push Capacity

Honeywell (NYSE: HON) recently reported solid earnings this quarter, finishing the year on a high note despite an adverse macro economic environment. It recorded an almost 10% increase in earnings in Q4. Furthermore, the company also witnessed an increase of 10% in earnings for the full year, making this the sixth consecutive year to record a double digit growth in income despite a fall in sales. This can be mainly attributed to increased operational efficiencies over the year. In 2016, the New Jersey based company hopes to maintain this momentum, reaffirming its guidance of $6.45 to $6.70 earnings per share (reflecting a growth of 6% to 10%). ^[1]

Financial Highlights in Q4:

• The company reported revenues of around $9.982 billion, marginally beating the consensus estimate of $9.980 billion.
• In terms of EPS, the company reported $1.58 this quarter, excluding mark-to-market pension expenditure. The result was a 10% increase over the prior year, though it was a penny shy of of the consensus.
• Free cash flows were recorded at $1.6 billion in the quarter, up 17% year over year.

Furthermore, in 2015, the company struggled to produce results in some of its major end markets, primarily due to increasing competition. Despite this, though, the company is confident that its growth will be on track come 2016. It expects revenues for 2016 to lie within the $39.9 to $40.9 billion range, reflecting a 4% to 6% increase.

Additionally, the company also underwent heavy restructuring during the year, charging almost $160 million in this respect (with $60 million in the fourth quarter alone). Such strategies could potentially help expand margins going forward.

See our complete analysis of Honeywell here

Two Key Acquisitions Completed during the Quarter:

Honeywell completed two major acquisitions within the quarter. The company concluded the deal with Elster, while it acquired the remaining 30% stake in UOP Russell.

Elster is a leading provider of thermal gas solutions for commercial, industrial and residential systems. It also manufactures a host of meters for different purposes, while providing other data analytics software. The deal, which is values at $5.1 billion, received regulatory approval ahead of schedule, enabling it to be concluded earlier than anticipated. Currently, the company is working hard to integrate the businesses, expecting to give us further information on the deal on Investor Day in March. It is expected that the acquisition will bring Honeywell close to $1.8 billion in annualised sales in the future.

Additionally, the company acquired the remaining stake in UOP Russell. Honeywell decided to acquire the initial 70% stake in the company in an attempt to leverage its global footprint. It aims to bring this primarily domestic focused modular technology to international markets. This strategy is already seems to be showing results. For example, in the fourth quarter, PV Gas (Vietnam’s primary gas provider) opted to use UOP Russell’s modular gas processing systems to separate LPG from natural gas at one of its facilities in Vietnam. It seems plausible that in the future, more such deals can be forged that will help the company increase business significantly.

Honeywell hopes to keep this M&A momentum going strong as they transition into the next financial year. This is bound to help increase the number of products and services the company offers, which in turn could drive the top line growth in the future.

Aerospace Mirrors the Performance of the Total Company:

During the quarter, sales in the segment grew by 2% on a core organic basis. On the Commercial OE side, sales increased by close to 9% on a core organic basis, primarily driven by double digit growth in business and general aviation engine shipments. In particular, Honeywell continues to see increased business in super midsize business jet platforms. Additionally, the company saw good growth in the commercial jet platform as demand from Boeing and Airbus remained steady, as both companies completed record deliveries this year. On the commercial aftermarket front, business increased by about 3%, propelled mostly by robust repair and overhaul activities. The company hopes to see a better performance going into 2016, despite the gloomy guidance delivered by Boeing for 2016.

At Defense and Space, sales declined by about 1% on a core organic basis in the quarter. International sales increased only marginally by 1% despite seeing good growth on a sequential basis. Going forward, the Defense and Space is poised to see good growth across all segments in 2016 as Defense spending in the U.S. increases in the year.

All in all, Honeywell is hoping for good results going forward. With continued efforts in restructuring, integration of new acquisitions the company is poised to raise sales and margins in the future.

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1. Honeywell’s Q4 Earnings Call Transcript, www.seekingalpha.com [↩]