Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Honeywell International Inc. gets a pass on its sales missteps, for now.

The $90 billion maker of thermostats and airplane navigation systems on Friday reported fourth-quarter earnings per share that met analysts' estimates and reiterated its profit guidance for 2017. But sales over the last stretch of 2016 came in lighter than expected and Honeywell had to lower its overall revenue outlook for the coming year by about 1.5 percent at the midpoint of its guidance range. That's not a great look considering it only gave that sales estimate last month and investors were already jittery about the company's ability to accurately forecast the challenges facing its business.

And yet, it makes sense that Honeywell's stock held its own and even occasionally traded up throughout the morning in New York.  

Over It
Honeywell cut its overall revenue guidance for 2017 and investors were unfazed as they focused on other things
Source: Bloomberg

Don't get me wrong, sales numbers are important and management should be held accountable for the things that they say. But Honeywell attributed its lowered outlook to currency swings, echoing comments made by Caterpillar Inc. on Thursday. At a time when no one can really say what President Donald Trump is going to do in terms of trade policy, I think companies can be forgiven for miscalculating foreign exchange.

That wasn't the guidance Honeywell investors were worried about anyway. Unlike at General Electric Co. where CEO Jeff Immelt's aggressive organic growth forecasts have recently made revenue a key focal point for watchers of the company, Honeywell has been more conservative with its revenue estimates, ensuring that the main point of attention remains its ability to uphold its hard-earned reputation as an efficient operator.

It's OK
Honeywell has missed analysts' revenue expectations 18 times in the last decade, but only 10 of those resulted in a stock price drop. The third quarter of 2013 also had an earnings miss.
Source: Bloomberg
Data is sorted by the widest gap to analysts expectations.

Consider that Honeywell has fallen short of analysts' revenue estimates 18 times in the last decade, compared with just a handful of misses in adjusted EPS, which were so marginal they almost don't count. There's only one instance over that stretch where the company fell short of both earnings and sales expectations. By comparison, a greater proportion of GE's 25 revenue misses over the same period corresponded with earnings disappointments. 

This We Care About
Honeywell rarely misses analysts' adjusted EPS estimates, but when it does, its stock is much more likely to fall than in the case of a sales disappointment
Source: Bloomberg

At Honeywell, the stock fell 56 percent of the time when there was a sales miss, and 80 percent of the time when there was an earnings miss, however slight. In other words, investors don't care quite as much about revenue shortfalls because the company has typically still found a way to grow its profits to predicted levels.  

That dynamic was again at play in Honeywell's latest earnings report. The company's segment operating margin came in at 19 percent for the fourth quarter and 18.3 percent for the year; both were better than what the company had projected at its December outlook meeting. Notably, Honeywell's aerospace unit, which has struggled amid weak demand for business jets and profit-eroding incentives for customers, turned in a better operating performance than analysts from RBC, Stifel Financial Corp. and Sanford C. Bernstein & Co. were expecting. That allowed Honeywell to raise its expectations for 2017 margins, thus maintaining its EPS outlook despite the sales disappointments.

If anything, Honeywell's earnings update is consistent with Chief Operating Officer Darius Adamczyk's December promise to focus on productivity and margin expansion in the face of weak growth prospects. The year is young and there are plenty of profitability pitfalls looming, but as Adamczyk prepares to take the CEO reins in March, investors are giving him  -- and Honeywell -- the benefit of the doubt.

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

  1. For a specific case study, compare Friday's stock shrug to the 7.5 percent slide in Honeywell shares after it lowered its 2016 earnings expectations in October.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net