The once-beleaguered aerospace sector faced stellar growth prospects in 2015, even before the price of oil collapsed. But now, cheaper energy costs combined with strengthening economic growth all but assure a banner year for aviation.
A major beneficiary of this sanguine confluence of trends is Honeywell International Inc. (NYSE:HON).
Honeywell specializes in aviation but it’s also a great cyclical play on overall economic growth, because it makes electronic controls for a variety of basic industries. HON stock is also a good value now, to boot.
Before the market’s opening bell today, Honeywell reported earnings and revenue that beat Wall Street’s expectations. Management also provided estimates of robust growth for Honeywell earnings in 2015.
Economic Recovery Should Benefit Honeywell
Honeywell is a pervasive supplier of avionics to both the military and civilian aerospace sectors. Aviation is in the midst of a huge resurgence, and Honeywell’s brand-name products are found in the cockpits of almost every major aircraft model.
The avionics industry is tightly regulated by national and international bodies, which creates an impossibly high barrier to entry. Founded in 1906 and now boasting a market cap of almost $80 billion, Honeywell is one of only a handful of avionics manufacturers with the engineering prowess and capital resources to quickly adapt to changes in aviation policies and strictures. That insulation makes Honeywell a technology company that doesn’t have to worry about competition from any Silicon Valley upstarts.
Honeywell is a blue-chip industrial company that rises on growth, which should hold it in good stead as the recovery really kicks into gear. It’s also diversified, providing safety against the volatility and market correction that’s likely sometime in 2015.
Moreover, the company has an entrenched presence in Europe, which should regain strength after the European Central Bank’s decision this week to make major purchases of bonds to stimulate the euro zone’s sluggish economies.
Another tailwind for HON stock is overseas demand for attack helicopters and combat fighter aircraft that are embedded with Honeywell’s sophisticated avionics and electronic controls. As tensions rise in regional hot spots, especially in Asia, emerging nations are buying aircraft that can’t fly without Honeywell’s hardware.
International demand will remain persistent in 2015, regardless of any Pentagon belt-tightening in the United States.
Indeed, wariness of China compelled Japan to announce plans to boost defense spending and its acquisition of American-made military aircraft, which should translate into more revenue this year in Honeywell’s coffers.
HON Stock: Earnings Beat Expectations
Honeywell today reported that fourth-quarter earnings came in at $956 million, a year-over-year increase of 1%. Earnings per share (EPS), adjusted for non-recurring costs, came in at $1.43. Total revenue fell 1.1% year-over-year to $10.27 billion, but both earnings and revenue topped expectations. The consensus estimate had been for EPS of $1.42 and revenue of $10.21 billion.
For the full year, the company reported earnings of $4.24 billion, or EPS of $5.33, and revenue of $40.31 billion. Management issued guidance for full-year 2015 EPS in the range of $5.95 to $6.15 — growth of 7% to 11% — with revenue expected to grow about 9% to a range of $40.5 billion to $41.1 billion.
The Bottom Line
Economic indicators point to a recovery in North America that’s gaining steam, while newly aggressive stimulative measures in Europe should get the sclerotic continent off its feet. Passengers in developing and developed countries are eagerly buying plane tickets again, and anxious countries in the Middle East and Pacific Rim are clamoring for military aircraft that are stuffed with Honeywell’s proprietary (and high-margin) electronic gear.
An industrial sector stalwart that thrives on economic growth, Honeywell also boasts a military and commercial diversification that provides safety amid an uncertain financial and geopolitical climate in 2015.
HON stock has risen 13% over the last 12 months — slightly outperforming the S&P 500 — with plenty of room left for growth. HON stock has a 12-month trailing price-to-earnings (P/E) ratio of only 19, compared to the P/E of 26 for its peer group of industrial goods. Today’s positive report on Honeywell earnings portend more good times ahead for HON stock.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
