Honeywell (HON) Q1 Earnings: What's in Store for the Stock?

Industrial goods manufacturer Honeywell International Inc. HON is scheduled to report first-quarter 2017 results before the opening bell on Apr 21. In the last reported quarter, the company’s adjusted earnings were in line with the Zacks Consensus Estimate of $1.74. Over the trailing four quarters, the company reported an average positive earnings surprise of 1.9%, beating estimates on three occasions.

Let’s see how things are shaping up for this announcement.

Key Factors in the First Quarter

On Feb 14, the company announced that it was selected for the Largest Petrochemicals Project in China to provide a range of process technology from Honeywell UOP. Per the deal, Honeywell UOP will offer a wide range of technologies in the form of license, design, key equipment, and state-of-the-art catalysts and adsorbents while its Process Solutions will provide the process controls and automation systems. This deal is likely to have an impact on the company’s revenues in the to-be-reported quarter.

On Mar 1, Honeywell debriefed investors about its earnings and sales expectations for the future quarters. At the same time, the company reiterated its guidance for the first quarter and full-year 2017. For 2017, Honeywell expects its earnings per share in the range of $6.85–$7.10 (excluding pension mark-to-market expense), significantly up from $6.46 in 2016. For the first quarter, earnings are projected to be in the range of $1.60–$1.64 per share.  

On Mar 17, Honeywell announced that its UOP's Ecofining process technology, developed in unison with Eni SpA E, will be utilized by the Diamond Green Diesel facility in Norco, LA, to augment its renewable diesel production capacity from 10,000 barrels per day to 18,000 by the second quarter of 2018. With such state-of-the-art products, Honeywell UOP aims to gain a competitive edge over its rivals and augment its revenues.

However, given its international presence, the company often faces unfavorable foreign currency movements, impacting its top-line growth. Any slowdown in the global economy, particularly after the Brexit referendum or the manufacturing industry as a whole will have an adverse impact on its business and hamper its long-term growth potential. A geopolitical impasse due to various conflicts and disruptions may further affect its international operations in the key markets. In order to fend off competition, Honeywell has to continually develop and maintain competitive products by adding innovative features that differentiate its products and prevent commoditization. These increase R&D expenditure and have often resulted in margin contraction and reduced bottom-line growth.

The cost of raw materials is a key element in the cost of products, particularly in Performance Materials and Technologies (cumene, fluorspar, perchloroethylene, natural gas and ethylene), Transportation Systems (nickel, steel and other metals) and Aerospace (nickel, titanium and other metals) segments. Honeywell is susceptible to material price inflation, which affects profitability. In addition, major components, product equipment items and raw materials are procured or subcontracted on a single-source basis with a number of domestic and foreign companies. As such, Honeywell is highly dependent on its supply chain to scale production and adjust delivery of long-lead time products during times of volatile demand. High operating risks in one of the key segments of its business might be a drag on its long-term sustainability.

Earnings Whispers

Our proven model does not conclusively show that Honeywell is likely to beat earnings this quarter as it does not possess 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 +0.62%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Honeywell International Inc. Price and EPS Surprise

 

Honeywell International Inc. Price and EPS Surprise | Honeywell International Inc. Quote

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

As it is we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Capital Bank Financial Corp. CBF, with an Earnings ESP of +6.82% and a Zacks Rank #3. You can see the complete list of todays’ Zacks #1 (Strong Buy) Rank stocks here.

Kansas City Southern KSU has an Earnings ESP of +0.86% and a Zacks Rank #3.  

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