Sarge fave Honeywell (HON) reported an outstanding quarter on Friday morning. Hitting, in my opinion, on all cylinders while increasing margin in the process.
For the second quarter, Honeywell posted adjusted EPS of $2.02, and GAAP of $2.04. Using either measure, the firm comfortably beat expectations. The fact that the adjustment worked to reduce profitability I think tells us something positive about the integrity of this management team.
Revenue generation for the period ended at $8.81 billion, also a beat, and good enough for 17.8% year over year growth. To be crystal clear, this number, while indeed a positive, is still 4.6% below the $9.24 billion that the firm generated for Q2 of 2019. That was seen as disappointing at the time. All that said, this (Q2 2021) was the first quarter of year over year revenue growth for Honeywell since Q3 2018.
As mentioned, margin improved across the board. For the firm in aggregate, operating margin increased 450 basis points to 18.1%. Operating Cash Flow landed at $1.278 billion, down 14%... however Free Cash Flow printed at $1.468 billion, up 17%. Running through segment performance... Aerospace is the largest single unit and the return of Boeing's 737-MAX to the skies has not hurt Honeywell. Sales in Aerospace increased 9% (7% organically) to $2.766 billion, Segment margin for Aerospace increased from 20.8% to 25.7%.
The second largest unit would be Performance Materials and Technologies. This unit experienced sales growth of 15% (10% organically) to $2.552 billion as segment margin increased from 18.9% to 20.8%. The Safety and Productivity Solutions saw sales increase a whopping 35% - think PPE - (35% organically) to $2.083 billion, as segment margin increased slightly from 13.8% to an even 14%. Lastly, Honeywell Building Technologies enjoyed a 20% increase in sales (13% organically) to $1.407 billion, as segment margin improved from 21.2% to 22.4%.
CEO Darius Adamczyk said, "We are especially pleased to see a turnaround in several of our key end markets that were hardest hit by the pandemic, with commercial aftermath and the UOP business returning to growth in the quarter."
For the full year, Honeywell now guides adjusted EPS to $7.95 to $8.10, up from prior guidance of $7.75 to $8.00. Wall Street is at $8.01 on that number. In terms of revenue, Honeywell now sees the full year at $34.6 billion to $35.2 billion, up from the prior view of $34.0 billion to $34.8 billion. Street consensus is for revenue of $34.88 billion.
The worm has turned in the right direction for this firm, and for the various parts of the firm as well. While we can not say that the stock has run into earnings, the stock has consistently gained all year (2021) long after running in late 2020. The firm pays shareholders a fair dividend of $3.60 per annum, which seems a little smallish in terms of yield (1.6%) due to the stock trading at 29 times forward looking earnings.
I am long this name. I would like to buy more on a dip. In fact, I wish this morning's bout of profit taking were a little more aggressive, so I could get aggressive as well.
Readers will catch Honeywell's stock at a point of inflection. The month of June built a cup pattern that was followed by a very swift developing handle earlier this week. A pivot of $234 that formed last week, was tested just yesterday (ahead of earnings) and failed.
All at the same time, we have an almost healthy looking daily MACD, and a rather neutral looking RSI (Relative Strength Index), but a Full Stochastics Oscillator that still screams "Overbought."
My Plan (minimal lots)
I do think that I add on this dip, though obviously I should have added in mid-June. I did not. That said. I do want to grow this position. I will not add significantly as this position is a winner and I do not want to wreck my net basis.
- Purchase 100 shares of HON at or close to the last sale of $227.78
- Sell (write) one HON $227.50 put expiring today (July 23rd) for about $0.90.
Note: This way I will add some right here, and if the shares come in late, pick up some more at an effective $226.60. If the shares do not sink below $227.50 later today, the first purchase drops in price to an effective $226.88.