Honeywell Gains From Robust Sales & Liquidity Amid Cost Woes

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On Oct 12, we issued an updated research report on Honeywell International Inc. HON . This Zacks Rank #3 (Hold) company is poised to grow on the back of stellar sales, new investments, greater operational efficacy and stronger liquidity. However, escalating cost remains a major cause of concern. Reflecting neutral analysts' sentiments, the Zacks Consensus Estimate for the company's earnings remained unchanged for both 2018 and 2019 over the past seven days.

Let's dig deeper into the fundamental factors influencing the stock.

Stock to Gain from Robust Sales & Liquidity

Honeywell's year-over-year revenue growth was 3.1% in 2017 and 4.3% in the first six months of 2018. The company expects that increased technology spending of the global commercial aviation industry and sturdier demand for state-of-the-art technology solutions, such as FalconConnect, will drive its top-line growth in the quarters ahead. Notably, Honeywell currently anticipates to generate organic sales growth of 5-6% in 2018. Per our estimates, the company's year-over-year sales growth will be 6.9% in the current year

Over the past three months, Honeywell's shares have rallied 4.2%, outperforming 0.9% growth recorded by the industry  it belongs to.

Honeywell pulled off an average positive earnings surprise of 2.44% in the past four quarters. The company believes investments made over commercial excellence, higher sales volumes, stronger productivity, stock buybacks and corporate tax benefits will boost its profitability, moving ahead. Honeywell currently projects earnings to lie in the range of $8.05-$8.15 per share in 2018, higher than the prior view of $7.85-$8.05 per share. Per our estimates, the company's year-over-year earnings growth will be 14.6% and 7.6% for 2018 and 2019, respectively.

The company has been steadily improving its liquidity on the back of the company's HOS Gold working capital tool and increased operational efficacy. The company's free cash flow has been steadily improving since the beginning of 2017.

Notably, in second-quarter 2018, the metric improved 42% year over year, supported by operational leverage across Honeywell's Aerospace and Performance Materials and Technologies segments. Free cash flow generation for the ongoing year is predicted to hover around $5.6-$6.2 billion.

Stock Looks Expensive, Cost a Woe

Honeywell's cost of sales escalating 4.5% in first-half 2018. The company is currently facing inflationary headwinds across its entire supply-chain process. Inflation in a number of areas, especially logistics, transportation and in certain material prices, like metals might continue to flare up costs and dent Honeywell's profitability in the quarters ahead.

Although the company's proactive restructuring initiatives have positioned it to navigate better than many of its peers, it is yet to witness signs of stabilization in few major end markets. For instance, a change in the U.S. government's defense and aerospace funding could also adversely impact sales of Aerospace's defense and space-related products in the quarters ahead. Also, high research and development costs may impede the Aerospace segment's profitability in the near future.

Moreover, on a Price/Earnings (TTM) basis, Honeywell's stock looks overvalued, compared with the industry, with the respective tallies of 20.0x and 18.7x for the past three-month period. Notably, the stock is currently trading higher than the median P/E (TTM) multiple for the same time frame. This makes us cautious toward the stock.

Stocks to Consider

Some better-ranked stocks are listed below:

Macquarie Infrastructure Company MIC sports a Zacks Rank #1 (Strong Buy). The company pulled off an average positive earnings surprise of 8.05% in the past four quarters. You can see the complete list of today's Zacks #1 Rank stocks here .  

United Technologies Corporation UTX holds a Zacks Rank of 2 (Buy). The company generated an average positive earnings surprise of 7.31% in the trailing four quarters.

Albany International Corporation AIN carries a Zacks Rank of 2. The company came up with an average positive earnings surprise of 28.80% during the same time frame.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: UTX , HON , MIC , AIN

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