Honeywell (HON) Q4 Earnings: What's in Store for the Stock?

Industrial goods manufacturer Honeywell International Inc. HON is scheduled to report fourth-quarter 2016 results before the opening bell on Jan 27. In the last reported quarter, the company’s adjusted earnings comfortably beat the Zacks Consensus Estimate by 7 cents. Over the trailing four quarters, the company delivered an average positive earnings surprise of 1.7%, successfully beating estimates on three occasions. Let’s see how things are shaping up for this announcement.

Key Factors in the Fourth Quarter

Honeywell recently offered a lackluster guidance for 2017 owing to continued macroeconomic woes. At the same time, the company announced that it expects fourth-quarter earnings to be around $1.74 per share, which is at the lower end of its previously guided range of $1.74–$1.78. The current guidance is the result of a tepid demand pattern for its business jets and mobile scanners due to sluggish global growth, volatility in crude oil prices and a tempered Chinese economy.

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, Honeywell is susceptible to material price inflation, which in turn affects profitability. Major components, product items and raw materials are procured or subcontracted on a single-source basis with a number of domestic and foreign companies. As such, fourth-quarter revenues are likely to be impacted by market volatility due to the U.S. presidential elections and uncertainty regarding it.

The impending quarterly results are also likely to be affected by the slowdown in the manufacturing industry as a whole owing to the Brexit referendum. To make matters worse, Honeywell has to continually develop and maintain competitive products by adding innovative features to prevent commoditization and fend off competition. This increases R&D expenditure and is likely to result in margin contraction and reduced bottom-line growth.

However, the company’s diligent focus on working capital management, free cash flow generation and a conservative balance sheet remain key positive attributes amid a challenging macroeconomic environment. With a flexible yet disciplined focus on cost and productivity, Honeywell aims at increasing its presence in high-growth regions, while restructuring its portfolio for core focus. Consequently, the company is expected to report relatively modest fourth quarter results and not overtly disappoint investors.

Honeywell International Inc. Price and EPS Surprise

 

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

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 pegged at 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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 stocks) 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:

Alliance Resource Partners, L.P. ARLP, with an Earnings ESP of +8.33% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Anadarko Petroleum Corporation APC, with an Earnings ESP of +13.04% and a Zacks Rank #2.

Apollo Global Management, LLC APO, with an Earnings ESP of +6.94% and a Zacks Rank #2.

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