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Based on management's guidance for 2019 and the underlying trends in its business, you can make a strong case for buying stock in Honeywell International (NYSE: HON). The questions are whether the company can hit its guidance in 2019, and where in the guidance range it could be.
Let's take a closer look at the details, and the recent update on business trends given by CFO Greg Lewis at the recent J.P. Morgan Aviation, Transportation, and Industrials Conference.
Why Honeywell's guidance makes it a buy
The midpoint of Honeywell's guidance for earnings per share (EPS), from $7.80 to $8.10, puts the stock at a forward price-to-earnings ratio of 19. Furthermore, the guidance range for free cash flow (FCF) of $5.4 billion to $6.0 billion puts it at a forward price-to-FCF multiple of 19.4 (see the chart below for historical reference). That's a good valuation for a stock forecast to grow earnings at nearly 10% in the next couple of years.
HON Price to Free Cash Flow (Annual) data by YCharts.
Furthermore, Honeywell has a good track record of meeting and beating its internal estimates. For example, the table below shows how 2018's actual results soundly trumped initial estimates for the year:
| Honeywell International | 2019 Guidance | Actual 2018 | Original 2018 Guidance |
|---|---|---|---|
| Organic sales growth | 2% to 5% | 6% | 2% to 4% |
| Segment margin | 20.7% to 21.0% | 19.60% | 19.2% to 19.5% |
| Adjusted EPS | $7.80 to $8.10 | $8.01 | $7.55 to $7.80 |
| Free cash flow | $5.4 billion to $6.0 billion | $6.0 billion | $5.2 billion to $5.9 billion |
Data source: Honeywell International presentations.
It's even more impressive considering that Honeywell lost $0.19 of EPS and $200 million in FCF in the fourth quarter, when it spun off turbocharger company Garrett Motion and home-products company Resideo Technologies.
In case you're wondering why the EPS and FCF guidance for 2019 look weak, it's largely due to the loss of those two companies. No matter, Honeywell still looks like a good value; underlying EPS is expected to grow by 6% to 10% in 2019.
Can Honeywell hit guidance?
Going back to the fourth-quarter earnings in early February, Lewis argued that "Based on what we can see today, we expect to be at the upper end of our sales guidance range for organic growth." That suggests management was taking a conservative approach to guidance -- perfect for investors looking for companies to underpromise and overdeliver.
| Honeywell Segment | 2018 Sales | End-Market Exposure (Share of Segment Revenue) |
|---|---|---|
| Aerospace | $12.9 billion | 42% commercial aftermarket, 27% U.S. defense, 22% commercial original equipment |
| Home and building technologies (HBT) | $5.4 billion | 45% building solutions, 40% building products |
| Performance materials and technologies (PMT) | $10.7 billion | 35% process solutions, 27% Honeywell UOP, 16% fluorine products |
| Safety and productivity solutions (SPS) | $6.3 billion | 32% industrial safety, 27% warehouse automation, 22% productivity products |
Data source: Honeywell International presentations.