The Most Important Takeaway From Honeywell International Inc. Earnings


The industrial company Honeywell topped analysts' expectations once again to wrap up 2013, posting its fourth earnings beat in the past five quarters. Honeywell's recent growth stems largely from the fine-tuning of internal operations as opposed to a robust economy, and the latest quarter was no exception. Despite share price gains of 175% in the past five years, shareholders have reason to believe Honeywell's streak can continue.

Margins matter most
In the latest quarter, Honeywell, like its industrial peer General Electric , managed to bolster the bottom-line in the face of a lackluster global economy. Honeywell CEO Dave Cote described it as a "slow-growth environment" in the company's press release, one that limited annual revenue gains to 4% in 2013.

Still, the fourth-quarter results were quite impressive on both the bottom and top lines, as Honeywell turned in 8% revenue growth (5% organic) and 13% growth in net income. Meanwhile, for the year, net income rose 12% due largely to the company's focus on increasing productivity.

Simply put, Honeywell's found a way to do more with less. For example, of Honeywell's four key business segments, only one posted sales growth greater than 5% for the year, but all four grew profits by more than 6%.

Without a heavy tailwind, Honeywell remains on what management describes as a "path to strong earnings growth." This is a road Honeywell's been on for quite some time. Shareholders that expect Honeywell to outperform the market should pay particularly close attention to the company's net margin growth. The following chart reveals the most important storyline at Honeywell since 2008:

Honeywell's Net Margin GrowthInfographics

In just five years, Honeywell's net margin percentage has more than quadrupled, from 2.2% to 10%. Honeywell went from lagging the industry average of 9.1% to leading the pack. For comparison, GE's 2013 net margin clocked in at 9.6%.

As I described last quarter, Honeywell's gains were accomplished in a tactical manner, one that avoided the fallout from widespread workforce reductions. Cote recognized the importance of maintaining the company's momentum even during the dark days of the economic downturn.

A few years later, its productivity initiatives are paying off, and this trend should continue. Management confirmed guidance for 2014, predicting sales growth of 3%-4% and earnings-per-share growth of 8%-12%.

Following today's report, Honeywell's price-to-earnings ratio, which has hovered around 20 for two years, is closer to 18 based on 2013 earnings. If Honeywell continues to hike margins, shareholders could be handsomely rewarded.

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