Honeywell: Even the Good News Is Bad
By Amy Barrett
The bad news just keeps coming for manufacturing giant Honeywell. After years of setbacks, including the aborted merger with General Electric (GE ) in 2001, the decline of its aerospace business in the wake of September 11, and the impact of a weak economy on a number of its businesses, investors may have thought things couldn't get much worse. But on Dec. 19, Honeywell (HON ) proved any remaining optimists wrong by announcing a $1.9 billion aftertax charge to cover, among other things, the potential liability from asbestos lawsuits and the reduction of some 5,000 jobs.
The move reflects Honeywell Chairman and CEO David Cote's struggle since taking the helm in February from Lawrence Bossidy to turn around the ailing conglomerate. Cote has already stumbled, most notably being forced to lower earnings guidance twice this year. Now it's clear that despite his aggressive efforts -- $1.4 billion in cost-cutting in 2002 and nearly $4 billion in aftertax charges over the last two years -- Honeywell's businesses are deteriorating at an alarming rate.
Ironically, the stock rose marginally on the news of the latest restructuring and closed at $23.91, up 21 cents on the day. That slight upward twitch apparently reflected the Street's optimism that an end to the asbestos litigation is finally in sight. True, the $900 million charge for asbestos liability removes some uncertainty for investors worried about the lawsuits' ultimate cost. But as Prudential Securities analyst Nicholas Heymann wrote in a note about the news: "Honeywell's challenges stretch far beyond asbestos, and seem equally ominous."
Operationally, Honeywell is being pounded by two forces. The first is the slower-than-expected economic recovery's impact on divisions such as Automation & Controls Solutions, which provides monitoring systems for complex manufacturing processes. The second is the continuing weakness in air traffic, which is pummeling the aerospace businesses.
Prudential's Heymann figures Honeywell's 2003 sales will decline 6%, to $20.7 billion, while operating earnings will fall an additional 19%, to $2.1 billion. Cote's backtracking earlier this year on earnings prospects "has hurt his standing on the Street," says Mark Demos, an equity analyst at Fifth Third Bancorp. "He needs some time to rebuild that."
To achieve that, Cote may need to make some big changes in Honeywell's portfolio. Prudential's Heymann figures that as much as 30% to 40% of its businesses could be dumped. High on the list: the specialty chemicals unit, which is barely profitable, despite $3.2 billion in sales. However, while unloading those businesses might be a smart long-term move, Heymann warns that could have a more immediate downside: Some units may have to be divested at a loss, creating a further drag on earnings.
Even as Cote grapples with a number of weak businesses, other forces are hurting the outfit. Honeywell will have pumped $800 million into its underfunded pension fund in 2002. And poor returns on pension assets due to the stock market's swoon in recent years could cut earnings by as much as $335 million in 2003. The headaches are far from over for Cote -- and for Honeywell's battered investors.
Barret is BusinessWeek's Philadelphia bureau manager
Edited by Douglas Harbrecht