Investors and analysts appear to be in the midst of a Honeywell (HON) head-spin.
The industrial conglomerate lowered its financial guidance for the third quarter and for the rest of the fiscal year, which caught the market off guard on Friday as the stock dropped by 7.5% by market close -- and the shares have continued to decline during the trading sessions following the negative pre-earnings announcement.
"We kind of felt like, there goes Honeywell again; this company is firing on all cylinders," TheStreet's Jim Cramer said on CNBC's "Squawk on the Street" on Friday. "But it's not."
Now, the measure of a good CEO is often how he/she is able to return value to shareholders -- which is something CEO Dave Cote has been great at doing thus far. During Cote's tenure, there was 458% shareholder value creation, according to a 2015 SEC filing. And since the Mar. 12, 2015, filing, HON shares have gained another 3%.
But how far is too far to get those returns that investors are looking for? Are layoffs and furloughs -- that create more work for employees with no change in pay-- efficiencies only a shareholder can enjoy?
During the second-quarter conference call, following another announcement of layoffs, Cote said the layoffs and furloughs are being "driven by just better and better efficiency within our Aerospace business." Yet, he never went into specifics about what those efficiencies are.
When Real Money pressed Honeywell on details, we were told that operating efficiencies improved as "a result of a number of moves the business has made, including implementing SAP and other technology deployments, a rigorous focus on, and progress with, the Honeywell Operating System, including Six Sigma projects and other investments."
Then, after reaffirming its financial outlook for fiscal 2016 at an investor day earlier this year, Honeywell lowered its third-quarter earnings guidance to $1.67 per share, compared to Wall Street's forecast of $1.70 per share. One of the key metrics for industrials, core organic sales, was reduced from flat to a decline of 1% for the period. The company also lowered its fourth-quarter and full-year earnings guidance.
While Honeywell provided more than one reason for the downward revisions, such as new reporting segments, the acquisition of Intelligrated and the adoption of a stock compensation accounting standard, the segment that signaled trouble -- and has been for a while -- was Aerospace.
"This guidance also reflects the impact of lower shipments to Business and General Aviation OEMs, continued program delays and completions in the domestic and international businesses within Defense & Space, and lower volumes in Productivity Solutions (part of Safety and Productivity Solutions)," the company said in a statement.
Honeywell CFO Tom Szlosek detailed the difficult conditions seen across the aerospace industry -- in particular, the business jet, the OEM and the aftermarket businesses. "The declines in aerospace and Safety and Productivity Solutions will lower our quarterly outlook by approximately $0.03," Szlosek said during a conference call with analysts on Friday. The CFO further noted that for the third quarter the expected organic sales growth rate was reduced from roughly flat to down 6%, a "reflection of the approximate $75 million in incremental OEM incentives."
Sure, we knew Aerospace was not in the best of shape. "The Aerospace and Defense industries have seen more than 35,000 job reductions in the past year alone, along with lowered sales and financial results from some of the biggest names in the industry," Honeywell said via email to Real Money.
But now, with no end in sight to the five-month-long labor dispute in South Bend, Indiana, where 316 union members have been locked out of the factory that makes airline brakes, it's not easy to see these efficiencies. Furthermore, those Honeywell employees who have been locked out in Indiana offer a different explanation for the layoffs -- John Suher Sr., a 60-year old millwright, told The Guardian that "it's basically corporate greed."
Whether or not it's corporate greed or technology deployments that are the reason for the layoffs, Honeywell Aerospace is still in for a tough year.
"[Honeywell's revised guidance] makes me feel that perhaps we've been too bullish in aerospace, which means there are a lot of companies that are about to report that are not going to be able to say good things about [a] line item that is very important for the U.S. economy," Cramer said.
That being said, Honeywell has been venturing into software more recently. Cote told Cramer in March on Mad Money that almost half of the company's engineers are developing software. And the soon-to-be-stepping-down CEO believes that those software investments will "really start to come to fruition in 2017." Even with troubles in aerospace, Honeywell is not coming in for a crash landing.
