Honeywell International Inc. (HON, Financial) reported earnings results near the end of last month that were strong across the board.
The company faced greatly difficult last year during the worst parts of the Covid-19 pandemic. Impacted the most was Aerospace, with the segment suffering double-digit declines in organic growth as demand for air travel was at extremely low levels.
The most recent quarter showed a significant improvement in every area, with Aerospace starting to turn the corner and return to pre-pandemic levels.
In addition, the company beat estimates and raised its guidance for the year, triggering one of my criteria for purchasing shares. Given this and the improving fundamentals, I added to my position in Honeywell at $229.62 this past Friday.
Let’s look at the company’s most recent quarter to see why I felt that the stock was a good buy at the current price.
Earnings highlights
Honeywell reported second-quarter earnings results on July 23. Revenue surged 18% year-over-year to $8.8 billion, beating Wall Street analysts’ estimates by $150 million. Adjusted earnings per share of $2.02 was a 60% increase from the prior year and 2 cents above expectations.
Organic sales grew 15% with currency exchange acting as a 3% tailwind to results. Segment margin expanded 190 basis points to 20.4%.
Looking closer at each segment, Aerospace had organic revenue growth of 7% as this segment lapped its weakest quarter of 2020. Commercial original equipment build rates are beginning to increase. Defense and space was lower by 10%. One very positive note was that commercial aftermarket is beginning to show signs of life, with this business growing double-digits both year-over-year and sequentially as the number of flight hours improved. Business aviation flight hours has now returned to pre-pandemic levels as well.
Honeywell Building Technologies had revenue growth of 13% due to high demand for products. Future business looks to be in good shape as well as orders were up 35% as customers have higher demand for building products and solutions. Building solutions services backlog was up 30% compared to the prior year. As has been the case since the pandemic began, healthy building solutions continue to perform well.
Performance Materials and Technologies was up 10% organically as nearly all businesses within this segment enjoyed higher demand. Process solutions and thermal solutions were the standouts as were catalysts and fluorine products.
Safety and Productivity Solutions demonstrated the best year-over-year result with organic revenue higher by 35%. Warehouse and workflow solutions were up double-digits. Demand for personal protective equipment continues to see high demand, something that should continue as Covid-19 continues to impact daily life around the world. Productivity solutions and services were up more than 100%.
The company’s balance sheet remains in good shape. As of June 30, Honeywell had total assets of $64.9 billion, including current assets of $25.7 billion and cash and equivalents of $12.3 billion. This is compared to total liabilities of $45.7 billion, with current liabilities of $18.1 billion. Total debt stands at $21.4 billion, with $5.2 billion due within the next year. This is a sizeable amount of current debt, but with cash and equivalents combined with an average free cash flow generation of $5.5 billion since 2017, the company shouldn’t have much trouble in handling its obligations.
Honeywell also provided revised guidance for the year. For 2021, the company expects adjusted earnings per share in a range of $7.95 to $8.10, up from guidance of $7.75 to $8.00 from the first quarter of this year and $7.60 to $8.00 from the fourth quarter of last year. Organic revenue growth is now projected to be 4% to 6%, up from 3% to 5% and 1% to 3% over the past two quarters. Total revenue is expected to be in a range of $34.6 billion to $35.2 billion, an improvement from last quarter’s estimate of $34 billion to $34.8 billion and fourth-quarter guidance of $33.4 billion to $34.4 billion.
Takeaways
Honeywell turned in an excellent quarter, one that delivered above the top end of its own guidance for organic growth, adjusted earnings per share and segment margin expansion.
The improvement in businesses is reflected in the company’s guidance as well. Honeywell’s last two quarters have seen an upward tick in expectations for both adjusted earnings per share and organic revenue growth. The trend in company guidance is a significant positive as Honeywell is seeing an increase in demand in all four of its segments.
That said, Honeywell is not yet back to where it was pre-pandemic. Second-quarter revenues were slightly behind 2019 results of $9.2 billion while segment margins were 90 basis points lower. Even reaching updated guidance still puts the company below pre-pandemic levels.
The important thing is that Honeywell is trending up as it recovers from the pandemic. Aerospace flight hours are back to where they were in a more normalized environment and commercial OE is less of a drag as it was last year. The more air travel stabilizes the more this area of the company will turn in better results.
And the other segments, though smaller than Aerospace, are seeing double-digit organic growth rates. In comparison the second-quarter of 2019, only Safety and Productivity posted higher sales, but the remaining businesses are getting closer to their pre-pandemic numbers. Continued strength in demand plus a further recovery from the pandemic should enable Honeywell’s segments to experience further gains.
Final thoughts
Honeywell produced a quarter with a lot of positives. Top and bottom lines were much higher compared to the same period of 2020 even if numbers are not yet back to 2019 levels. There is still a ways to go in some areas of the company, especially Aerospace, but Honeywell appears to be well positioned to benefit from an improved operating environment.
I didn’t acquire this most recent batch of shares on the cheap. Using my purchase price and the midpoint for revised guidance of $8.02, Honeywell trades with a forward price-earnings ratio of 28.6 from where I added to the position. For context, the stock has an average price-earnings ratio of 17.5 since 2011.
Honeywell beat analysts’ estimates and raised guidance for the second consecutive quarter. Combining this with the improving fundamentals in every segment made for compelling reasons to purchase Honeywell in my opinion, even if the valuation is rich.
