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Honeywell (HON) Q3 Earnings: Will the Stock Disappoint?


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Industrial goods manufacturer Honeywell International Inc. HON) is scheduled to report third-quarter 2016 results before the opening bell on Oct 21. In the last reported quarter, the company’s earnings beat the Zacks Consensus Estimate by 2 cents. Over the trailing four quarters, the company delivered an average positive surprise of approximately 0.97%. Let’s see how things are shaping up for this announcement.

Key Factors in the Third Quarter

Honeywell recently revised its guidance downwards. It currently expects third-quarter EPS to be around $1.60, down from earlier guidance range of $1.67–$1.72. The adjusted EPS of approximately $1.67 is in line with the prior guidance range. The current guidance is a result of decline in shipments to Business and General Aviation OEMs, program delays and completions in the domestic and international businesses within Defense & Space, and reduced volumes in Productivity Solutions.

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 a number of its major end markets. 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 and services. The high research and development costs could also be a drag on the Aerospace segment margin and affect its profitability.

In addition, the company also provided fourth-quarter EPS guidance of $1.74–$1.78, up 10–13% year-over-year. For full-year 2016, EPS guidance is lowered to $6.60–$6.64, from the earlier expectation of $6.60–$6.70 per share. Organic sales are now expected to decrease by 1–2% for the full year.

During the quarter, the company declared a pro rata spin-off dividend of its divested entity AdvanSix. Each shareholder is entitled to receive a share of AdvanSix for every 25 shares of Honeywell on par value of $1.00 per share. With the spin-off, the company’s overall revenues is likely to decline, thereby adversely impacting its earnings as well.

In Aug 2016, the company announced that it was realigning its Automation and Control Solutions business segment into two new segments – Home and Building Technologies and Safety and Productivity Solutions, effective third quarter. The separation into two entities will improve efficiency and accelerate decision-making, as well as lead to a more complete integrated suite of technologies for the relevant end markets. Alongside, the company completed the acquisition of leading supply chain and warehouse automation firm, Intelligrated for $1.5 billion. The deal is a strategic fit to Honeywell’s S&PS unit with its complementary products. Intelligrated's leading supply chain automation solutions would boost Honeywell's portfolio. Its management expertise is also likely to enrich human capital.

HONEYWELL INTL Price and EPS Surprise



Earnings Whispers

Despite all attempts to restructure its business, our proven model does not conclusively show that Honeywell is likely to beat earnings this quarter as it lacks the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP:Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently at 0.00%.

Zacks Rank: Honeywell carries a Zacks Rank #4 (Sell).

As it is, we caution against Sell-rated stocks (#4 and #5), which should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:, Inc. (AMZN - Analyst Report) , with an Earnings ESP of +6.98% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP of Moody's Corporation (MCO - Analyst Report) is +1.70% and it has a Zacks Rank #2. The company is expected to report its numbers on Oct 21.

Synergy Resources Corporation (SYRG - Snapshot Report) has an Earnings ESP of +100% and a Zacks Rank #3. It is expected to release results on Oct 20.

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