Starting Point

Honeywell Sets a Low Bar for Itself

The key is proving that these numbers are as much of a starting point as management indicated they might be.
Photographer: Tony Duffy/Getty Images
GENERAL ELECTRIC CO
+0.20
At Closing, February 16th
15.05 USD

A good rule thumb for industrial companies right now is to do the exact opposite of what General Electric Co. did for the past few years. Honeywell International Inc. seems to have taken this to heart.

The $119 billion company released its outlook for 2018 on Wednesday, calling for organic revenue growth 2 percent to 4 percent and earnings per share in the $7.55 to $7.80 range. There's little wow factor in those numbers -- at the midpoint, both sets fall short of analysts' expectations in light of a growing global economy and positive trends in Honeywell's primary markets. "Call it prudence or conservatism or whatever you want," Chief Financial Officer Tom Szlosek said when pressed by analysts on aspects of the uninspiring guidance. "We're trying to set up a plan that we are confident in being able to achieve."

Uninspiring

Honeywell's outlook is fine, but analysts were expecting more

Source: EPS estimate is based on Bloomberg-compiled average of analysts' estimates. Organic growth estimate is from Stifel Financial Corp.'s Rob McCarthy. Margin estimate is from RBC's Deane Dray.

Well, isn't that refreshing. Fellow industrial conglomerate GE fired off several ambitious outlooks after deciding to separate out the bulk of GE Capital, and eventually had to walk many of them back. The most memorable is former CEO Jeff Immelt's claim that the company could get to $2 in EPS by 2018, a goal he clung to even as challenges in the company's energy-exposed businesses made that virtually impossible. GE is now targeting $1.00 to $1.07 in 2018 adjusted EPS, under its new financial reporting metrics. 

To be fair, Honeywell has historically played it safe with its earnings outlook. More than half of the company is tied to shorter-cycle businesses that can be difficult to predict a year in advance. So Honeywell likes to give itself enough of a buffer that it can meet the range no matter what happens. In 2016, for example, overall revenue ultimately came in below even the company's reduced target, but earnings per share were actually still above the mid-point of Honeywell's initial goal. In 2017, being conservative allowed the company to shift its EPS guidance range toward the high end four times.  

Playing it Safe

Honeywell has consistently followed through on its earnings outlooks, while things have been much messier at GE

Source: Bloomberg, company filings and presentations

NOTE: GE guidance for 2015 combines the company's outlook for its industrial and GE Capital expense. The ultimate number for GE Capital was impacted by the pace of divestitures in that business. Looking just at industrial EPS, GE was initially targeting $1.10 to $1.20 for a midpoint of $1.15. It delivered $1.14. The 2016 and 2017 numbers for GE are based on the company-defined industrials + verticals EPS. Guidance for 2018 is based on GE's new financial reporting metrics and is not exactly apples to apples with the $2 target.

Having said that, the company seems to have set a particularly low bar for itself this time around. Honeywell's EPS target includes a 12-cent benefit from a lower share count, reflecting an unexpected $1.5 billion stock buyback in the fourth quarter. Stripping that away from the midpoint of its guidance range implies an even bigger disappointment relative analysts' expectations.

Turning to organic growth, the midpoint of its outlook range implies a slowdown from the 4 percent gain in revenue excluding the impact of currency swings and M&A that it's forecasting for the current year. This is despite the fact that Szlosek said the company's markets are favorable, trends are good and the momentum in its longer-cycle businesses is better than this time last year. Its margin goals were also underwhelming, with Honeywell walking back its target for the fourth quarter due to the dilutive impact of expanding the installed base for the Intelligrated warehouse-automation products it acquired in 2016 and an unplanned plant outage, among other things.  

Hmm...

Honeywell bounced around Wednesday morning as investors tried to make sense of its ho-hum outlook. They seem to have ultimately accepted it as a conservative starting point.

Source: Bloomberg

There's nothing wrong with aiming to avoid a GE-like egg-on-the-face scenario. But the key is proving that these numbers are as much of a starting point as management indicated they might be. Honeywell's decision to funnel cash to a buyback versus an acquisition also highlights the challenges it faces in a pricey M&A market. Szlosek said the company has an attractive pipeline of potential deals for all its business units. Hopefully it can capitalize on some of those. Finding some kind of growth-boosting deal will be key to rebuilding the decent chunk of revenue Honeywell will part with when it spins off of its turbochargers and consumer-facing home technologies businesses next year.

A better-safe-than-sorry mantra only works if you don't still wind up sorry.

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

    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

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