Instant Analysis: Honeywell International's 2017 Outlook

By Lee Samaha Markets


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What happened?

Honeywell International Inc. (NYSE: HON) was the latest industrial giant to give its 2017 outlook. Whereas General Electric Company (NYSE: GE) delivered a relatively positive outlook, with CEO Jeff Immelt sounding an optimistic note on the U.S. economy, Honeywell International's outlook was a bit weaker -- somewhat like peer and onetime merger candidate United Technologies Corporation's (NYSE: UTX) outlook.

While General Electric Company is set to grow organic revenue by 3% to 5% in 2017, United Technologies (organic sales growth forecast for 2% to 4% in 2017) and Honeywell International (1% to 3%) are both facing near-term headwinds. Here arethe key takeaways from Honeywell International's outlook. Starting with the remainder of the year:

  • Full-year 2016 EPS of $6.60 at the low end of the $6.60-to-$6.64 range given in the third-quarter earnings presentation.
  • Full-year 2016 sales, segment margin, and free-cash flow guidance left unchanged.

Now the 2017 guidance:

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  • Organic sales growth in the range of 1% to 3%.
  • Segment margin of 18.8% to 19.2%, implying an expansion from 2016's segment margin of18.1%, which is ahead of previously implied guidance for 18.55% to 18.85%,
  • Full-year EPS guidance range of $6.85 to $7.10, which straddles the analyst consensus for $7.08 and implies growth of 6% to 10% -- just about hitting the "targeting double-digits" growth guidance given in the third-quarter presentation.
  • Free cash flow in the range of $4.6 billion to $4.7 billion, implying growth of 8% to 11%.

It's always slightly disappointing to see weak looking EPS guidance, but the segment margin outlook is good, and the free cash flow guidance is a confirmation that the company's free cash flow conversion will increase notably in the future as the company moves out of a heavy investment phase.

Does it matter?

It's a slight weakening of an investment thesis that otherwiseremains compelling. Evenafter the reduction in full-year 2016 estimates made on the third-quarter earnings presentation, Honeywell International is still an attractive stock. The share price recovered quickly through November:

HON data by YCharts

Moreover, the value proposition -- based on underlying free cash flow generation -- is good. On the outlook presentation, management suggested that capital expenditures would take a mild step down in 2017 to around $1 billion and then a broader step down to the $800 million range, as the company moves out of its heavy investment phase.

Given the forecast for free cash flow of around $4.65 billion, ongoing growth in earnings, and the reduction in capital expenditures,it's not hard to see free cash flow hitting $5 billion to $5.2 billion in 2018.

That could see Honeywell trading on an enterprise value (market cap plus net debt)-to-free cash flow multiple of 18.8, and that's not bad for a company growing earnings in double digits. If you canignore the near-term headwinds, then Honeywellis a good value.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.