Summary
Honeywell is likely to focus on further cost reductions in 2019 as well as redeploying capital into M&A.
Automation, particularly in software, controls, and measurement, is likely to be a key M&A focus, but another deal in aerospace could make sense.
Honeywell isn't especially cheap, but it does still have some near-term upside as well as long-term appeal.
As multiple short-cycle industrial sectors appear to be slowing, Honeywell(HON) looks like a pretty good option going into 2019. This conglomerate’s third-quarter earnings had a lot of moving parts, but the aerospace, safety, productivity, automation, and specialty chemical operations all appear to be in good shape, and the company continues to make progress with its free cash flow conversion. With management taking renewed aim at fixed costs and very likely to deploy significant capital into additional M&A in 2019 and beyond, I like Honeywell’s positioning as both a shorter-term safe haven and longer-term winner.
A Fairly Calm Third Quarter
While Honeywell’s third-quarter earnings last month didn’t offer a lot of pizazz in terms of beat-and-raise momentum, there were nevertheless some solid positives in the report.
Organic growth of 7% was perhaps not so exceptional this quarter, but still a good outcome, and Honeywell was hardly alone in seeing some erosion in reported gross margin (50 bps on a reported basis). While revenue was slightly ahead of expectations, the 10% growth in segment-level income drove a 2% beat at that line, with a modest beat in segment margins.
