Honeywell International's Earnings Results Prove Sellers Wrong

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The stock market has been incredibly volatile in the past few weeks. Some investors have been scorched, while others took advantage of overreactive, panic selling. But when Honeywell International reported a stellar earnings report on Friday, it proved that it was one of the stocks investors should have been buying in the recent sell-off, not selling. 

For the third quarter, Honeywell beat on top and bottom line earnings estimates, increased margins and free cash flow, and raised full-year guidance. The company did the same thing last quarter as well, making some investors wonder why the stock made 52-week lows last week. Clearly, selling the stock was a mistake. Let's take a closer look at the quarter to see.

Business segments
As of this quarter, Honeywell reports its business in three segments: aerospace, automation and control solutions (ACS), and performance materials and technology (PMT). In previous quarters, the company used to report an additional segment, that being transportation systems, which is now reported with aerospace. 

For the quarter, aerospace sales were flat year-over-year, but margins increased by 150 basis points. Margins also climbed for the ACS and PMT segments as well, up 40 basis points and 20 basis points, respectively. These two segments also saw sales climb 9% and 7%, respectively. 

As a whole, Honeywell only grew revenues by 5%, but grew earnings per share a whopping 19%.

Sometimes, earnings per share can be manipulated higher by share buyback and other accounting tricks. But it should say something when segment profit — which is simply the profit generated from each business segment — grew almost twice as much as sales, at 9%. This even includes the "corporate" segment, which negatively affected the company by $51 million. Furthermore, net income climbed a robust 18%, to $1.17 billion in the third quarter. 

It's pretty impressive that a company can grow net income by almost 20% after growing sales by only 5%. But there's one other area that I personally love seeing grow: free cash flow.

In the third quarter, free cash flow climbed 12.3% to $974 million. The $56 million increase in expenditures only made up roughly a third of the increase in cash from operating activity, which climbed to $1.23 billion this quarter. Here is the breakdown of the free cash flow:


Third Quarter 2013

Third Quarter 2014


Cash from Operating Activity






Free Cash Flow



Source: Honeywell's third quarter earnings presentation (opens PDF)

What to expect going forward
For the fourth quarter, Honeywell expects sales to be flat year-over-year and for margins to increase by 120 basis points.

Management increased full-year guidance to the range of $5.50 to $5.55, which represents year-over-year growth of 11% to 12%. Overall, management expects fiscal 2014 sales growth to be in the 3% to 4% range, with margins expected to increase 70 basis points in the year. 

The company's $5 billion buyback plan, which was announced last December, combined with increased margins, should help propel earnings higher, even if sales growth remains in the flat to low single digits range. 

Also in the release, management says the company "remains in-line with 5-year targets." For those of you that don't know of Honeywell's five-year plan, it can be read about here. But for those that are looking for the basics, the company plans to return ~50% of its cash flow from operations — which is expected to be in the $30 billion to $33 billion range — to shareholders in the form of dividends and buybacks over the next five years. 

Those are promising prospects for long-term shareholders. Even more promising? The stock just made 52-week lows last week and is down slightly for the year. Following a strong earnings report and another promising quarter, that looks like a solid buying opportunity to me.

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The article Honeywell International's Earnings Results Prove Sellers Wrong originally appeared on

Bret Kenwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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