Honeywell gets a well-deserved stock boost on terrific quarter, adequate guide

Published Thu, Jul 28 202211:12 AM EDTUpdated Thu, Jul 28 202211:30 AM EDT

Club holding Honeywell International (HON) reported solid second-quarter results before the opening bell Thursday and the stock moved higher. Revenue at Honeywell rose 4% year over year organically to $9 billion for the quarter, exceeding expectations of $8.68 billion. Adjusted earnings of $2.10 per share outpaced expectations of $2.03 per share. Segment margin of 20.9% rose 50 basis points year-over-year, a bit short versus the 21.5% consensus. Bottom line It was very strong quarter from Honeywell as the better-than-expected headline results came on the back of sales beat in every operating segment. Once again, we saw the strength of Honeywell's pricing power. While there were certain dynamics out of management's control – such as supply constraints – the team effectively executed on and managed through the difficult environment. Third-quarter (current quarter) guidance came in a bit light. However, full-year guidance was in-line to better-than-expected, with management raising its estimated midpoint for organic sales growth, adjusted earnings per share and segment margins. With 65% of its sales focused on end markets such as commercial aviation, defense, energy, and nonresidential, Honeywell is in a strong position to weather any near-term economic weakness. Companywide Q2 results The backlog at the end of the quarter — agreements for sales to be realized in future periods — increased 12% year over year to $29.5 billion. On the post-earnings call, management called out a continued recovery that gives them confidence in strong demand throughout the remainder of the year. Honeywell generated operating cash flow of $789 million and free cash flow of $843 million, versus expectations of $892 million and $572 million, respectively. Those results are down 38% and 43%, respectively, versus the year ago period with management attributing the declines to higher working capital requirements ahead of anticipated volume growth in the second half of the year. Despite the low cash flow in the quarter, Honeywell's strong balance sheet allowed management to deploy roughly $2.3 billion back to shareholders during the quarter: $1.42 billion went to share repurchases and another $691 million in dividend payments. In total, management repurchased about $2.4 billion in stock so far in 2022 and reaffirmed their intent to purchase a total of $4 billion in shares throughout the full year. Before moving on, we want to note that on the call, management called out that throughout the rest of the year Honeywell is "staying ahead of the inflation curve with our strategic pricing action." This is key as pricing power, which comes from innovation and best-in-class offerings, is how companies protect profits in the face of inflation. Guidance Looking ahead, management provided both third-quarter and full-year 2022 guidance updates. Starting with the third quarter, management forecasts sales of $8.9 billion to $9.2 billion, versus expectations of $9.14 billion. Management expects Q3 earnings of $2.10 to $2.20 per share, short of expectations for $2.27 per share. Segment margin is expected to come in between 20.9% and 21.2%, below the a 21.9% consensus coming into the print. For the full-year management tightened sales guidance to a range of $35.5 billion to $36.1 billion from $35.5 billion to $36.4 billion previously versus a $35.88 billion consensus. Adjusted per-share earnings guidance was also tightened to a range of $8.55 to $8.80 from $8.50 to $8.80, outpacing the $8.65 expected, at the midpoint. Regarding the top line, that target represents organic growth of 5% to 7% — or a higher range of 7% to 9%, excluding the impact of a decline in Covid-driven mask sales and lost Russian sales. Additionally, full-year segment margin is expected to come in between 21.3% and 21.7%, up from 21.2% to 21.5% previously, and 30 to 70 basis points higher than a year ago. However, that projected ranged was still short of the 21.8% the Street was looking for. Excluding the impact of Quantinuum — a previously announced business combination between high-powered computing Honeywell Quantum Solutions and Cambridge Quantum — segment margin is expected to expand between 60 and 100 basis points year over year. Full-year free cash flow guidance was unchanged at between $4.7 billion and $5.1 billion versus a $4.91 billion consensus. Excluding the impact of Quantinuum, free cash flow is expected to come in between $4.9 billion and $5.3 billion, also unchanged. Assumptions making up the full-year guide, include mid-single-digit percentage point organic growth in Aerospace, driven by growth the commercial market; double-digit organic growth in Honeywell Building Technologies; high-single-digit organic growth in Performance Materials and Technologies, driven by growth in the oil and gas/petrochemical markets as well as the specialty chemicals market; and a mid-single-digit organic decline in Safety and Productivity Solutions as growth in the Industrial Productivity market will be more than offset by weakness in e-commerce. Segment Q2 results Aerospace Sales: $2.9 billion versus $2.86 billion expected Organic Growth up 5% year over year Operating Income: $767 million versus $764 million expected Segment Margin: 26.5%, up 80 basis points year-over-year Within the segment, we saw a 22% organic increase in Commercial Aviation Original Equipment, a 19% organic increase in Commercial Aviation Aftermarket and an 11% organic decline in Defense and Space. Honeywell Building Technologies Sales: $1.53 billion versus $1.47 billion expected Organic Growth up 14% year over year Operating Income: $360 million versus $346 million expected Segment Margin: 23.5%, up 110 basis points year-over-year Within the segment, we saw a 20% organic increase in Products and a 6% organic increase in Building Solutions. Performance Materials and Technologies Sales: $2.69 billion versus $2.56 billion expected Organic Growth up 10% year over year Operating Income: $601 million versus $543 million expected Segment Margin: 22.3%, up 150 basis points year-over-year Within the segment, we saw a 1% organic decline in UOP that was more than offset by a 7% organic increase in Honeywell Process Solutions and a 21% organic increase in Advanced Materials. Safety and Productivity Solutions Sales: $1.83 billion versus $1.77 billion expected Organic Growth down 10% year over year Operating Income: $231 million versus $262 million expected Segment Margin: 12.6%, down 140 basis points year-over-year Within the segment, an 18% organic decline in Safety and Retail and 25% organic decline in Warehouse and Workflow Solutions was partially offset by a 19% organic increase in Productivity Solutions and Services and a 25% organic increase in Advanced Sensing Technologies. (Jim Cramer's Charitable Trust is long HON. 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