Honeywell CEO Proves Loeb Wrong as Aerospace Boosts Profit

(Bloomberg) -- Honeywell International Inc.’s confidence in its aerospace business was bolstered by expanding sales of in-flight internet and cockpit controls that drove first-quarter earnings higher than analysts’ expected. The company raised its 2018 profit target.

A drag on earnings as recently as last year, the aerospace business is taking off on higher demand for commercial aircraft parts and service, increased defense spending and a nascent rebound for business aircraft. Anticipating the turnaround, Chief Executive Officer Darius Adamczyk ignored pressure last year from activist investor Daniel Loeb to sell the business.

Sales in the unit rose 12 percent to $3.98 billion, compared with a 4.3 percent decline a year earlier when the outlook was still bleak. Aerospace organic sales, which strip out currency swings and acquisitions, rose 8 percent, contributing to a “strong quarter with clean operational upside,” said Steve Tusa, an analyst with JPMorgan Chase & Co.

“We had flagged aerospace as a potential source of upside heading into the quarter, but 8 percent organic was well above what we had contemplated,” Tusa said in a Friday note to clients.

Shares rose 1.7 percent to $150.66 at 9:47 a.m. in New York.

The company is benefiting from robust economic growth in most regions, especially the U.S., where a corporate tax cut has boosted business confidence. A recovery in the oil market is driving stronger sales at the company’s energy-related business, and the e-commerce boom is ratcheting up demand for Honeywell’s warehouse-efficiency products.

Honeywell had total sales of $10.39 billion in the first quarter, up from $9.49 billion a year earlier, the company reported. That beat analysts’ projections of $10 billion, according to the average of estimates compiled by Bloomberg. Adjusted earnings were $1.95 a share, excluding costs related to planned spinoffs, topping expectations of $1.91.

Sales Growth

Overall organic sales rose 5 percent, topping the company’s own forecast of a gain between 2 percent and 4 percent. Adamczyk has emphasized growth by expanding the salesforce and pushing for more software content on products.

“Honeywell had a very strong start to 2018, with first-quarter results that were driven by exceptional sales and operational performance,” Adamczyk said in a statement.

Loeb’s Third Point announced a stake in Honeywell less than a month after Adamczyk had taken over as CEO and immediately urged him to dump the aerospace business. Instead, Adamczyk decided to spin off its automobile turbocharger unit by the end of September and the home-products segment, which includes the iconic Honeywell-brand thermostat, by the end of the year.

Exiting those two businesses will cleave $7.5 billion off Honeywell’s sales and pressure Adamczyk to expand the company through acquisitions, whittling down the company’s growing cash pile of about $11 billion.

Honeywell is “very aggressively” pursuing acquisition targets, Adamczyk said on a conference call with analysts. The company wants to purchase companies for about $3 billion or less and isn’t looking to make any “megadeals,” he said.

“I do hope that one or two deals materialize here in the next quarter or two,” he said on the call.

Earnings Guidance

Honeywell raised its 2018 earnings target to a range of $7.85 to $8.05 a share, up from $7.75 to $8. The annual sales forecast was also raised to as much as $43.5 billion from a top figure of $42.5 billion.

“We were looking for just a boost to the low end of 2018 EPS guidance, and today’s boost to the total range is likely to be viewed as a modest upside surprise,” said Deane Dray, an analyst with RBC Capital Markets, in a note. “Given Honeywell’s historical ‘under promise, over deliver’ mantra, the new range is likely to still be viewed as conservative.”

The company expects earnings per share of $1.97 to $2.03 in the current quarter. The midpoint of the forecast is $2, which is higher than analysts’ estimates of $1.99. Honeywell expects sales in the current quarter of as much as $10.8 billion.

Honeywell fell 3.4 percent this year through Thursday, trailing a 0.7 percent increase for the Standard & Poor’s 500 Index. Last year, the stock climbed 32 percent while the index rose 19 percent.

©2018 Bloomberg L.P.

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