• Lallic Partners

Huge profits in a fearful market – how Honeywell is powering through COVID-19

Dominic Byrne | June 2nd, 2020 | Editor: Eden Chan



Honeywell International Incorporated (HON) is positioned for a stable long-term, but volatile short-term as COVID-19 puts pressure on business divisions. The company, whose stock has been subject to market trends, has seen a surprisingly significant profit increase on a minimal increase in revenue. But will COVID-19 catch up to the behemoth company?

The U.S. based multinational conglomerate, which traded before COVID-19 at $184, has seen an enormous loss in share price to 2017 price levels of $147 (2/6/2020). The company has exposure to markets from brake pads to 2D barcode scanners and is highly diversified – a haven for investors during uncertain times. While the Dow Jones Industrial Average saw a 23% plunge during the first quarter of 2020, Honeywell’s net income soared 11.8%.

Balance Sheet and Fundamentals:

Honeywell has a price to earnings ratio (PE) of 16 and earnings per share (EPS) of $8.70 – indicating growth and reliability. These figures are in line with industry standards such as 3M’s (MMM) PE of 17.18 and EPS of $8.52. These figures are reflected by strong sales and profit in a volatile market. As a result of market pessimism and fear, their PE of 16 was 19% lower than the 20.4 PE seen in Q3/4 2017. Sales in quarter one for its four major market segments, Aerospace, Building Technologies, Materials and Technologies and Safety and Productivity saw a total net profit increase of 11.8%. This net profit illustrates a decrease in operating expenses, high-profit margins and better managerial decisions, under CEO Mike Madsen. The companies top-line numbers were reflected by two principal business segments, Aerospace and Productivity solutions.

Best performer: Aerospace

Honeywell Aerospace, a division of the conglomerate, manufactures aircraft engines and avionics, a market which is seeing a massive decrease in demand given global border closures. The company is known for its constant development in this sector – which makes up more than half of Honeywell’s revenues. According to their 2020 Q1 report, (10-Q) Honeywell’s aerospace company saw profits increase 12% from $838 million to $937 million. Interestingly, overall revenues only increased 1% from 3.34 billion to 3.36 billion over the same period – representing stagnation in demand. This 12% increase in profit on a mere 1% increase in revenue is an indication of high-profit margins and a reflection of firm management decisions. However, delayed payments and lagging demand for aerospace avionics and engines as a result of border restrictions may be unkind to Honeywell Aerospace in Q2 2020.

Retrieved from: Honeywell 10-Q 2020 document

Worst Performer: Safety and Productivity solutions

Their Honeywell Safety and Productivity Solutions (SPS), or workflow and productivity solutions, was Honeywell’s worst-performing division. The segment saw a 10% decrease in reported sales, from $1582 million to $1424 million, while segment profit lagged 16% from $212 million to $178 million year-on-year. This significant loss was a result of inventory destocking, lower channel sell-through and subdued demand for products. Regardless, this segment is performing well given current market conditions, a testament to reliable management and robust capital prioritisation. Their safety segment will be well-positioned for profiting during COVID-19. The company ramped up production of N-95 masks, among other virus protective gear – a market segment in high demand given the U.S has nearly 100,000 recorded deaths. SPS is well-positioned for a successful and profitable future and will likely see an increase in revenue from Q1 2020 to Q2 2020.

Retrieved from: Honeywell 10-Q 2020 document

Future Outlook:

The companies Q1 2020 report was underwhelming for investors. The PE fell, EPS was lower, and revenue decreased. At face value, the company underperformed. However, analysis of their profitability in various segments shows a promising future for the stock. Their ability to increase net profit 12%, while revenue increased a mere 1% in their aerospace industry is a suggestion of what is to come. Strong management and high margins, however, are not enough to stay head above water during uncertain and fearful times. Without a doubt, COVID-19 has battered the market, Honeywell included, creating further uncertainty and volatility in the market. While Honeywell will more than likely see another disappointing quarter in Q2 2020, the company is well-positioned to deal with COVID-19 and advance into 2021 and beyond based on its strong business segments, high margins, lowering expenses and stable management.


Written for Lallic Partners

Published by Koki Mashita

Image Citations:

https://www.newsday.com/long-island/politics/trump-mask-coronavirus-reopen-bright-fauci-task-force-primary-1.44409243

https://www.bizjournals.com/charlotte/news/2020/03/25/honeywell-plans-unpaid-leave-for-employees-pay.html


References:

https://www.fool.com/investing/2020/04/27/is-honeywell-stock-a-buy.aspx

https://www.barrons.com/articles/honeywell-stock-falls-despite-strong-earnings-heres-why-51588334475

https://www.forbes.com/sites/greatspeculations/2020/04/28/a-recession-could-take-honeywell-stock-below-100/#2d366f2a2b0a

https://finance.yahoo.com/

https://www.marketwatch.com/investing/stock/hon

https://finance.yahoo.com/news/look-honeywells-price-over-earnings-143350665.html


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