On Thursday morning Honeywell (HON) released the firm's fourth quarter financial results.
For the three-month period ended December 31st, Honeywell posted an adjusted EPS of $2.52 (GAAP EPS: $1.51) on revenue of $9.186B. The adjusted earnings print did beat consensus view by a penny, as the revenue number, despite being good enough for growth of 6.1%, fell short of what Wall Street was looking for.
Adjustments were made primarily for Pension mark to market expense ($0.65 per share) and net expense related to the NARCO buyout ($0.38).
Looking at operations, product sales increased 3.1% to $6.556B, as service sales increased 4.6% to $2.63B. Cost of revenue increased 3.2% to $6.124B as cost of products sold decreased slightly and cost of services sold increased 14.7%. Administrative expenses increased 3.8% to $1.249.
What may have been the kicker as net income dropped 29.1% to $1.021, was the item labeled as "Other expense". This item swung from a tailwind of $355M for the year ago comp to a headwind of $480M for the quarter reported here, amounting to a negative swing of $835M.
Segment Performance
- Aerospace generated net sales of $3.204B (+10.6%). This drove segment profit of $890M (+6.1%) on a segment margin of 27.8%.
- Performance Materials and Technologies generated net sales of $2.86B (+9.8%). This drove segment profit of $628M (+5%) on a segment margin of 22%.
- Safety and Productivity Solutions generated net sales of $1.607B (-8.3%). This drove segment profit of $325M (+72%) on a segment margin of 20.2%.
- Honeywell Building Technologies generated net sales of $1.514B (+7.8%). This drove segment profit of $375M (+27.7%) on a segment margin of 24.8%.
Fundamentals
For the quarter reported. operating cash flow was $2.4B on an operating margin of 25.8%, while free cash flow landed at $2.1B on free cash flow margin of 23.1%. This brought full year operating cash flow to $5.3B and full year free cash flow to $4.9B, which will matter when we get to guidance.
Turning to the balance sheet, Honeywell ended the period with a net cash position of $10.11B and inventories of $5.538B. This brought current assets to $24.982B, which was down slightly from a year earlier. Current liabilities add up to $19.938B (up small), leaving the firm with a current ratio of 1.25 and a quick ratio (sans inventories) of 0.98. Both of these ratios are fine.
Total assets amount to $62.275B, including "goodwill" and other intangibles of $20.719B. At 33.3% of total assets, I am a little uncomfortable, but I am old. This is not abnormal in this modern era. Total liabilities less equity comes to $44.956B. This includes long-term debt of $15.123B, which is in addition to $2.717B in short-term debt that was included in current liabilities.
This balance sheet is fine. I would prefer to see either a little more cash or a little less debt, but again, that's me. There is nothing here that should worry investors.
Outlook
For the full year, Honeywell sees sales of $36B to $37B, which would be good for year over year organic growth of 2% to 5%. The problem there is that this brings revenue guidance at the midpoint, below the $36.9B that Wall Street had in mind. The firm expects segment margin expansion of 50 to 90 basis points, and adjusted EPS of $8.80 to $9.20, which would be flat to up 5%. This is another problem as Wall Street was looking for something close to $9.13.
Operating cash flow for the year is seen at $4.9B to $5.3B, leading to free cash flow of $3.9B to $4.3B. Still beefy, but not up to the standard set in 2022. This outlook has to be seen as somewhat disappointing. Either that, or conservative. It's clear early on Thursday morning that the algorithms are not pleased.
My Take
What's clear here is that the firm is still very well run. Aerospace is the firm's leader, but every segment is a contributor, and every segment sports a rather handsome profit margin. Honeywell is an industrial conglomerate and has to be looked at in that light. The firm has to be cautious headed into either a recession or a tough environment at the least. I am impressed here, more than one would think. The balance sheet is not a concern.
The stock went out on Wednesday evening trading at 23 times forward looking earnings, and maybe that is a little expensive. The firm also pays shareholders $4.12 per year just to stay invested. That's a yield of 2%, which is not bad.
You have a productive, profitable business here that is very close to being a cash flow beast, even if 2023 is down from 2022. That could also be caution speaking. I think HON is investable at a discount.
What we have here is a stock that tried to break out form a double bottom reversal with a $204 pivot this winter. That breakout failed as HON gave up both its 21 day EMA (exponential moving average) and 50 day SMA (simple moving average). Relative Strength is weak and the daily MACD (Moving Average Convergence Divergence) does not impress.
The pattern that we see coming out of that failed breakout seems to be too long for me to take it as a bull flag, but it might be a broadening descending wedge. Both are patterns of bullish reversal.
I see it this way. There is the 200 day SMA as potential support, but if you look back a year, HON seems to ignore that line. Should the stock close above the low of $198.81 from January 20th, then I think we may be on to something here. However, we have to be careful.
Should the stock extend the lower trendline of our pattern, then our broadening, descending wedge is not done broadening, nor descending. This stock is definitely on the shopping list, but we need our price under our conditions. Either that, or we walk away.
