Honeywell Earnings: The Market’s Overreaction to Short-Cycle Weakness Presents Long-Term Opportunity

There were no meaningful surprises in wide-moat rated Honeywell’s HON second-quarter earnings results, as earnings were in line with our expectations. We raise our fair value estimate to $228 from $225, but that’s solely due to time value of money.

Our long-term thesis for Honeywell remains intact. We think the market is overreacting to lukewarm performance in Honeywell’s short-cycle businesses. That perspective is overly near term, which presents an opportunity for the long-term investor. In fact, both building technologies’ and performance and material technology’s results were in lockstep with what we penciled in for the quarter.

Commercial aerospace original equipment and warehouse sales were a bit below the trend we hoped to see, but favorable aerospace mix had a positive effect on aerospace margins and provided overall aero margins with 200 basis points more of margin benefits than we were expecting. We’re not overly concerned on the equipment side of the house because of the continued difficulties associated with supply chain constraints (as opposed to weakening demand) and Honeywell’s strong backlog. Once an order is placed, it tends to stay in place, given the mission-critical nature of the industry, and Honeywell’s past due backlog is trending in the right direction.

Aerospace also has a new leader in Jim Currier. He’ll have big shoes to fill as he succeeds the retiring Mike Madsen, but we like that Currier has spent 17 years in the business.

Safety and productivity solutions, or SPS, margins were mostly as expected. Management has been focused on taking margin in that business with better project selectivity. While the dynamics are hard to peg down, we’d still expect margin expansion in SPS despite revenue declines.