Honeywell International's (NYSE: HON) second quarter is shaping up to be a very interesting one for investors. In short, the company faces a mix of earnings headwinds and tailwinds, and it's hard to predict whether the net result will be a raising of the company's full-year guidance. Let's take a look at three key things to look out for when CEO Darius Adamczyk discusses current trading and outlook. <\/p>\n
After a first quarter in which, according to Adamczyk, Honeywell \"met or in most cases exceeded\" management's guidance ranges across its segments, it was somewhat puzzling that the full-year guidance range was only raised by $0.05 at the bottom end, to between $6.90 and $7.10. <\/p>\n
One of the reasons for such conservatism was management's caution regarding its short-cycle business, which is 60% of its total revenue, and typically exposed to current business sentiment. However, as you can see below, business-cycle indicators remain in growth mode, and there is no reason to expect weakness in the short-cycle business within the home and building technologies, safety and productivity solutions, and performance materials and technologies segments. <\/p>\n
While the anecdotal evidence is positive for Honeywell's short-cycle businesses, there are question marks on parts of its aerospace businesses. For example, one-time merger candidate United Technologies Corporation (NYSE: UTX) gave a presentation on its aerospace businesses during the recent Paris Air Show. <\/p>\n
In a nutshell, Dave Gitlin, president of United Technologies's aerospace systems segment, claimed his company continues to face sales headwinds with wide-body jets, business jets, regional jets, and helicopters. It's a message echoed by Honeywell's CFO Tom Szlosek at an investor conference in June, and it wouldn't be surprising to see Honeywell report continued weakness in these areas. <\/p>\n
It matters because Honeywell has significant exposure to business and general aviation. The aerospace segment contributed nearly 38% of total company sales in 2016, with commercial aerospace (original equipment and aftermarket) contributing around half of aerospace sales. In turn, business jets (original equipment and aftermarket) contribute around a third of commercial aerospace -- or around 6.5% of total company sales. <\/p>\n
Simply put, Honeywell could do with some signs of improvement in business and regional jet build rates; management's commentary is worth looking out for. <\/p>\n
Will Honeywell International's earnings tailwinds outweigh its headwinds in the second quarter? Image source: Getty Images. <\/p>\n
Honeywell has faced significant earnings headwinds in the last year or so, due to original-equipment aerospace incentives granted to win out on new aircraft platforms. While they are necessary to insure long-term recurring revenue from positioning on the new aircraft, they have significantly held back profitability in the segment. <\/p>\n
On the last earnings call, Szlosek argued the incentives would prove a $25 million headwind in the first half, but would turn into a $70 million tailwind in the second half -- the second half of 2016 was incentive-heavy for Honeywell. It's worth keeping an eye on whether these numbers are confirmed in the results presentations. <\/p>\n
It's especially important because Honeywell's aerospace incentives were more than expected in 2016, and part of the reason why the company missed its original revenue guidance that year. <\/p>\n
All told, it's hard to know what the net impact will be. There are reasons to believe management is being conservative with its short-cycle businesses (within its non-aerospace segments), but the company could face continued headwinds in aerospace. If aerospace disappoints, then management could face renewed pressure from activist investors to spin off the segment. <\/p>\n
As ever, the market will focus on the near-term impact on full-year earnings guidance, and investors will be hoping for a positive surprise from Adamczyk in July. <\/p>\n
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What to Look Out For When Honeywell International Reports Earnings - Madison.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Honeywell International's (NYSE: HON) second quarter is shaping up to be a very interesting one for investors. In short, the company faces a mix of earnings headwinds and tailwinds, and it's hard to predict whether the net result will be a raising of the company's full-year guidance. Let's take a look at three key things to look out for when CEO Darius Adamczyk discusses current trading and outlook. Continue reading