What To Expect From Honeywell’s 3Q Earnings As It Makes A Strategic Shift?

by Trefis Team
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Honeywell (NYSE: HON) reports its third quarter financial results on 19th October. We expect revenue to come in 6.7% higher on a year-on-year basis (y-o-y), as the company’s aerospace and chemical business continue to show secular growth. With one-time spin-offs, and higher margins from operational efficiency, we expect earnings to come in 10-12% higher y-o-y.

We have a price estimate of $175 per share for Honeywell. This price represents a 12% upside from current market levels. View our interactive dashboard for Honeywell Expectations Going Forward, and modify the key drivers to visualize the impact on Honeywell’s price.

 

 

In the third quarter, Honeywell spun off two of its key businesses – Resideo Technologies (not competitive in the long term), and Garrett Motion. This will allow Honeywell to consolidate, and focus on their core businesses, which includes its automation, specialty chemicals, and aerospace business. Further noting, since taking over at the position of CEO,  Darius Adamczyk’s decision to restructure Honeywell away from hardware to software is expected to start paying dividends this quarter.

Honeywell’s management has made it clear that it wishes to focus on the software business; which has both higher revenue and higher margins. This strategy they believe will lead to long term robustness, as both local and international markets move away from the capital-intensive focused product mix which Honeywell has traditionally offered.

 

Keeping in line with the CEO’s strategy, Honeywell acquired Transform Technology, for a little under $500 million. Transform’s business is focused around warehouse automation, which has been a key part of acquiring big ticket investors such as Amazon.com. Moreover, 80%+ of Transform’s business comes from e-commerce. Transform currently has revenue of $100 million, and is expected to grow by 30% in 2018; annual growth should be similar in 2019. Also, Transform’s acquisition offers important insight into the strategy of the company going forward. It should be additionally noted that Honeywell is expected to continue acquiring businesses in the coming quarters and years; especially with management deciding to cap cash at $10 billion.

Honeywell continues to see stable growth across its other key businesses, specifically specialty chemicals as upstream oil & gas companies, mainly those dealing in LPG, have continued to increase their capital expenditure through the quarter.

Overall, Honeywell is expected to continue its strategic shift towards becoming a higher margin/less capital intensive company. Key investments in automation and software are expected to be the mainstay of the company’s strategy going forward. While growth will be moderate, improvements in margins and ROIC will help the business improve its bottom-line.

 

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