After struggling for years during the bleak aftermath of the Great Recession of 2008-2009, the global aircraft industry is finally on a firm flight path for recovery. But it’s not just the airline operators or aircraft OEMs that profit from this resurgence — ancillary equipment makers are poised for boom times in 2015 as well.
Just look at Honeywell International (HON), the world’s largest provider of commercial and military avionics. As the avionics segment explodes over the next year, Honeywell stock should get a substantial lift.
The consultancy firm Market Info Group predicts that combined annual revenue of the commercial and military avionics markets will reach $26.5 billion by 2020, compared to $15 billion in 2013.
This year, Honeywell laid out a growth strategy that includes a plan to spend $10 billion on acquisitions in high growth areas over the next five years — more than double the $4.7 billion it spent in the past five years.
The avionics industry is highly regulated, particularly in regard to safety, which creates a high barrier to entry. This week’s tragic events concerning the crash of AirAsia Flight 8501 over the Java Sea help explain why.
Founded in 1906 and now boasting a market cap of $72.9 billion, Honeywell is one of only a handful of avionics firms with the ability to quickly adapt to changes in government aviation policy and safety regulations.
Honeywell also has the engineering and financial wherewithal to withstand the long gestation period of new aviation products. Designing, building, testing and bringing to market new cockpit electronics takes billions of dollars and many years. Major avionics competitors such as Rockwell Collins (COL) are similar to Honeywell in terms of products and services, but none rival Honeywell’s size and pervasive customer base among the Pentagon, foreign military buyers and civilian airline operators.
As the aerospace industry embarks on a multi-year boom, HON is an entrenched player that will continue to reap the lion’s share of the spoils.
Honeyed Prospects for HON
Honeywell stock faces especially sweet prospects in 2015, because it supplies the ultra-complex avionics and electronic components that major manufacturers need to outfit the cockpits of civilian airliners and combat jet aircraft. Emerging powers in the increasingly fractious Pacific Rim region are posting large orders for expensive fighter jets from U.S. aerospace manufacturers.
These military OEMs rely on Honeywell to outfit their cockpits and provide other electronics. Fueling this demand is the saber rattling of an ascendant China, which is making affluent neighbors such as Japan, Singapore and Taiwan nervous and in a mood to buy Honeywell-outfitted combat jets made in America.
That said, HON is diversified in both the commercial and military sectors, a further boon for Honeywell stock because the company doesn’t have all of its eggs in either the civilian or military sector. Meanwhile, the company’s entrenched position as a supplier for popular commercial passenger aircraft such as the Boeing (BA) 737 positions Honeywell stock for appreciation as the aviation sector improves in tandem with economic recovery.
Honeywell Stock Set to Take Off
This month, Honeywell reiterated its forecast for fourth-quarter 2014 earnings per share (EPS) of $1.37 to $1.42, in line with Wall Street’s expectations. However, HON lowered its revenue outlook for the quarter to a range of $10.1 billion to $10.2 billion — down from the previous range of $10.3 billion to $10.4 billion.
The lower revenue outlook largely stems from the vicissitudes of Pentagon procurement, as federal funding for programs ebbs and flows with each quarter. The overall trend for global military spending, however, should remain firm.
For fiscal 2014, Honeywell affirmed its outlook for EPS of $5.50 to $5.55, again in line with analysts’ expectations, but lowered its revenue forecast to a range of $40.1 billion to $40.2 billion from the previous range of $40.3 billion to $40.4 billion.
For fiscal 2015, Honeywell forecasts EPS of $5.95 to $6.15, an increase of 8% to 12%. Honeywell also recently boosted its annual dividend to $2.07, which represents a modest payout ratio of 34% of earnings, which indicates room for future dividend increases.
The Bottom Line
Honeywell is well positioned to reap the avionics profits of a resurgent aerospace industry, in which the company’s sophisticated electronic components boast brand name status. With optimistic earnings forecasts and industry growth as tailwinds, Honeywell stock should cruise to higher growth altitudes.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
