Honeywell (NASDAQ:HON) Misses Q3 Sales Targets

Industrial conglomerate Honeywell (NASDAQ:HON) fell short of the market’s revenue expectations in Q3 CY2024, but sales rose 5.6% year on year to $9.73 billion. The company’s full-year revenue guidance of $38.7 billion at the midpoint also came in 1.1% below analysts’ estimates. Its non-GAAP profit of $2.58 per share was 3.1% above analysts’ consensus estimates.

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"Honeywell executed through a challenging environment in the third quarter, delivering segment margin1 and adjusted earnings per share1 above the high end of our guidance," said Vimal Kapur, Chairman and CEO of Honeywell.

Company Overview

Originally founded in 1906 as a thermostat company, Honeywell (NASDAQ:HON) is an aerospace and defense manufacturing company building technologies, performance materials, and safety and productivity solutions.

General Industrial Machinery

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Honeywell struggled to generate demand over the last five years as its sales were flat. This is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Honeywell’s annualized revenue growth of 4.1% over the last two years is above its five-year trend, but we were still disappointed by the results.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, Honeywell’s organic revenue averaged 4.3% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not M&A) drove most of its performance.

This quarter, Honeywell’s revenue grew 5.6% year on year to $9.73 billion, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 10.7% over the next 12 months, an acceleration versus the last two years. This projection is noteworthy and illustrates the market thinks its newer products and services will fuel higher growth rates.

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Operating Margin

Honeywell has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 20.7%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Honeywell’s annual operating margin rose by 1.5 percentage points over the last five years, showing its efficiency has improved.

In Q3, Honeywell generated an operating profit margin of 19.1%, down 4.5 percentage points year on year. Since Honeywell’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Earnings Per Share

Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Honeywell’s EPS grew at an unimpressive 4.7% compounded annual growth rate over the last five years. On the bright side, this performance was better than its flat revenue and tells us management responded to softer demand by adapting its cost structure.

Diving into the nuances of Honeywell’s earnings can give us a better understanding of its performance. As we mentioned earlier, Honeywell’s operating margin declined this quarter but expanded by 1.5 percentage points over the last five years. Its share count also shrank by 10%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Honeywell, its two-year annual EPS growth of 10% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q3, Honeywell reported EPS at $2.58, up from $2.38 in the same quarter last year. This print beat analysts’ estimates by 3.1%. Over the next 12 months, Wall Street expects Honeywell’s full-year EPS of $10.10 to grow by 6.4%.

Key Takeaways from Honeywell’s Q3 Results

We enjoyed seeing Honeywell's full-year EPS guidance beat analysts’ expectations. On the other hand, its organic revenue unfortunately missed. The company also closed on two acquisitions: CAES Systems for $1.9 billion and Air Products's LNG business for $1.8 billion. At the same time, it shared its intention to spin off its Advanced Materials business and exit its PPE business. Overall, this quarter could have been better. The stock traded down 3.5% to $212.54 immediately following the results.

Honeywell may have had a tough quarter, but does that actually create an opportunity to invest right now?What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.