Honeywell: Not Good Enough

Margins and sales hint at possible future trouble spots.

For Honeywell, good wasn't quite good enough.

The industrial giant raised the lower end of its 2016 profit and revenue forecasts on Friday after delivering better-than-expected sales for the first quarter and buying back a decent chunk of stock. Honeywell remains on track to deliver its seventh straight year of increased earnings per share and a revenue gain -- no small feat in this tough environment for global growth.

So how did investors reward Honeywell for this good news? They drove the stock down as much as  2.3 percent. 

What do they see? It's not like there was anything really alarming in the $86 billion company's results. Yet there were a few signs of possible trouble spots, and that was enough to sow seeds of apprehension -- especially because analysts were looking for assurances that Honeywell is getting back to the business of consistent sales growth and margin improvements after a failed pursuit of a blockbuster deal with United Technologies. 

Not Enough

Despite Honeywell raising the lower end of its earnings-forecast range for 2016, shareholders weren't satisfied.

Source: Bloomberg

Intraday times are displayed in ET.

Segment operating margins fell to 18.1 percent in the first quarter, weaker than what analysts were anticipating, largely because of acquisition costs, currency hedging expenses and incentives for aerospace customers (the company makes airplane cockpit controls among a range of other industrial and aerospace products). While the performance was mixed across Honeywell's different business lines, all of them fell short of expectations on the margin front, according to Nick Heymann at William Blair.

This quarter could just be a fluke, or it could be a sign that margin expansion is getting harder to come by after years of aggressive cost cuts. Honeywell is already one of the most efficient industrials out there. For now, the company is sticking with its operating-margin guidance of 18.9 percent to 19.3 percent for 2016.

Then there's the company's sales performance. Excluding the impact of acquisitions, sales increased about 1 percent in the first quarter. That was better than forecast, but Honeywell is projecting that organic revenue will be flat to down 2 percent in the second quarter. That means it will have to have a stellar second half of the year to achieve its 2016 guidance of 1 percent to 2 percent growth. Honeywell's management thinks they can deliver, and perhaps they will -- they did, after all, exceed expectations in the first quarter.

Reason to Worry?

It hasn't been a great start to the year for major U.S. industrials. Those that have reported earnings so far mostly saw sales drop on an organic basis.

Source: Bloomberg

For the fourth quarter of 2015, Honeywell's core organic revenue growth was flat.

But the "everything-will-get-better-later" idea is becoming a theme in the industrial space, with GE repeating the same mantra to investors when it also reported earnings on Friday. GE said first-quarter organic sales declined for the industrial part of its business, but it still expects revenue to grow as much as 4 percent this year. At a certain point, the challenges of today raise the question of whether these companies are being too optimistic about tomorrow.

Honeywell had already climbed about 11 percent so far this year through Thursday for roughly double the gain of the S&P 500 Industrials Index, so it's no wonder shareholders weren't satisfied with just good news and optimism. Maybe everything will get better -- but investors may need to see it to believe it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Brooke Sutherland in New York at

    To contact the editor responsible for this story:
    Beth Williams at

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