Honeywell (HON) reports second-quarter earnings on Friday morning and I'm not entirely sure how to play it. The company reported a mixed first quarter and the stock seems to be stuck in a tight range between $100 and $107. It's like investors are in a wait-and-see mode.
Although the headlines said Honeywell beat first-quarter consensus, if you look below the surface results were pretty mixed. Total year-on-year revenue was down 5% to $9.2 billion. Aerospace declined 6%. Even automation and control solutions fell 3%. ACS was supposed to be the best segment of the bunch in Q1. Nope.
Revenue was also lower than expected -- but margins beat expectations, which drove earnings higher than predicted. Segment operating profit rose 8% to $1.7 billion, and segment margin rose 220 basis points to 18.7%. Earnings came in at $1.41, $0.02 higher than consensus.
Here's the confusing part. Management guided second quarter revenue lower, but increased margin guidance. As a result, the bottom range of earnings per share came up $0.15. So, if all you care about is EPS, you are okay: The range for Q2 is $1.46 to $1.51. The consensus is at $1.49.
Investors probably don't care too much about Q2 because the back half of the year will make all the difference: The third and fourth quarters are Honeywell's big earners. Investors are expecting Q3 and Q4 revenue of $9.9 billion and $10.3 billion, respectively. If the company guides down organic growth in these quarters, I don't see how they can offset EPS guidance with more margin magic, especially considering the company is taking a beating on the foreign currency front. Honeywell can only raise margins so much to offset organic decline and the currency hit.
For the year, analysts are expecting $6.09 in earnings. With the unexpected decline in organic revenue in Q1 and weakness into Q2, management really has to thread the needle to keep the stock over $100. For now, I'll sit on the sidelines to wait and see what happens.