Honeywell Earnings: No Real Surprises in Third-Quarter Results

Nothing in wide-moat-rated Honeywell’s HON third-quarter results materially alters our long-term view. Therefore, we maintain our $228 fair value estimate. In fact, sales and earnings were right in line with expectations, and segment operating margins of 22.6% were nearly 20 basis points better. Honeywell earnings did beat the top end of the range by 2 cents, but we were already baking in a slight beat. We did slightly trim our long-term margin expectations for safety and productivity solutions, but this was fully offset by time value of money. Overall, this quarter bore few surprises. Encouragingly, the stock now trades at a decent discount to fair value (about a 22% discount as of this writing).

Unsurprisingly, aerospace once again led Honeywell’s sales and earnings growth, despite flattish operating margins given mixed headwinds in original equipment. Commercial aviation’s aftermarket, in particular, saw strong sales growth, though so did defense, each rising strong double digits. Separately, process solutions was once again a strong grower. Best of all, higher-margin aftermarket services also grew double digits. However, overall performance materials margins contracted due to lower volumes in advanced materials, which more than offset these benefits.

Despite considerable challenges in parts of Honeywell’s business, we’re encouraged that its short-cycle business continues to show signs of stabilizing sequentially. In fact, supply chain improvement led to a reduction in past-due backlogs. The outlook for both aerospace and energy looks favorable for Honeywell, despite persistent macroeconomic headwinds, and we expect supply chains will continue to heal here.