Near-Term Headwinds Nick Honeywell's Guidance
Honeywell (HON) shares tumbled on Oct. 7 as the company pre-emptively lowered 2016 organic revenue growth and EPS guidance ahead of its third-quarter earnings release. Persistent weakness in business jet and helicopter markets, about $75 million of incremental aircraft OEM incentives, and weaker-than-expected demand in the company’s scanning and mobility segment led management to decrease its third-quarter sales expectations and revise full-year 2016 EPS and revenue growth downwards. We were already at the low end of management’s newly narrowed EPS guidance of $6.60-$6.64, and despite near-term headwinds, our thesis for wide-moat Honeywell remains intact. As such, we do not anticipate making any material changes to our $112 fair value estimate.
Honeywell delivers this news following an active third quarter, which included the division of Honeywell’s Automation and Control segment into home and building technologies and productivity solutions. The $1.5 billion Intelligrated acquisition, which brings warehouse automation to Honeywell’s portfolio, also closed in the quarter, shortly before completing the divestiture of Honeywell Technology Solutions, a government-focused aerospace services business. Finally, the spin-off of the AdvanSix resins and chemicals business on Oct. 2 removed a highly cyclical business from the portfolio.
We think investors, who had pushed the stock up about 12% year to date before the sell-off, were surprised by the guidance downgrade and are now increasingly concerned that Honeywell’s portfolio repositioning will not translate into faster organic growth. However, we expect these large-scale transformations need time to build momentum. We like Honeywell’s increased focus on emerging-market opportunities, as well as connected enterprise and energy efficiency solutions, all of which are avenues that we believe can boost Honeywell’s sales and earnings growth profile.
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