What to do with Honeywell stock after its sharp post-earnings pullback

Dow stock Honeywell was one of the biggest drags on the 30-stock average Thursday after Club industrial giant reported mixed third-quarter results compounded by a mixed outlook. Revenue for the three months ended Sept. 30 rose 5.6% year-over-year to $9.73 billion but short of the LSEG compiled consensus estimate of $9.9 billion. Adjusted earnings per share increased 8.4% to $2.58 and beat the $2.50 consensus forecast. EPS was also above the high-end of management’s previously provided guidance. HON YTD mountain Honeywell YTD Honeywell shares sinking 4.5% after the release was understandable but represents an opportunity. That’s because we’re encouraged by the setup into 2025. Thursday’s pullback is buyable — and therefore, we’re reiterating our 1 rating and $235 per share price target. Bottom line While third-quarter sales missed, strong execution and a focus on cost discipline by management led to better-than-expected profitability. Cash flow generation was also a bright spot. We believe the team, under new CEO Vimal Kapur, is positioning Honeywell for future success despite some setbacks. Delays in project-led businesses, little progress in the short-cycle recovery, and supply chain disruptions forced management to adjust their outlook for the remainder of the year. A short business cycle means a quick turnaround from order to delivery. The ability to place an order and take delivery quickly makes short-cycle businesses more sensitive to the economy. Honeywell Why we own it: Honeywell is a provider of industrial technology solutions to companies in various industries. We appreciate its exposure to the aerospace industry as a parts supplier. The portfolio has, however, become a bit bloated. We think further upside will come as the company divests non-core businesses and focuses both internal investments and acquisition efforts around management’s three targeted mega-trends: automation, the future of aviation, and the energy transition. Competitors: Emerson Electric , RTX , 3M Weight in portfolio: 3.14% Most recent buy: April 10, 2024 Initiated: July 5, 2020 Honeywell has proven to be a frustrating holding. Every time the stock looks like it may be on the verge of a real breakout, we get some reason for it to sell off. That said, we have been seeing a series of higher lows over the past year — likely in acknowledgment that the business is becoming stronger as the portfolio is revamped even in a tough operating environment. Commentary While still looking for a short-cycle business rebound to take hold and orders to materialize in the future, some of the Q3 disappointment is the result of things being pushed out. Honeywell did, however, realize a book-to-bill ratio of 1.1 times thanks to a 2% organic increase in orders. As a result, the company exited the third quarter with another record backlog of $34 billion, a 10% increase from a year ago. On the post-earnings conference call, Kapur highlighted the company’s closing of four major acquisitions: Carrier’s security business, Civitanavi, CAES Systems, and Air Products’ LNG operations. “All four deals fit seamlessly into our portfolio, bolstering our capability across automation, aerospace and energy transition, and enhancing our growth trajectory,” he said. These $9 billion worth of purchases are expected to add bout $2 billion in annual sales. Kupar also reminded investors about plans to spin off Honeywell’s advanced materials business and sell its personal protective equipment business, moves that he expects to enhance Honeywell’s organic growth rate and profitability. Kapur also said, “We plan to return to margin expansion again in 2025 as a combination of volume, leverage and productivity actions across the portfolio should offset modest mix headwinds in aerospace from OEM [original equipment manufacturer] activity and integration of CAES” and its defense electronics technology. Segment margin, similar to an adjusted operating income margin, expanded slightly to 23.6% in Q3 and beat estimates. Guidance Management’s outlook for the current quarter, Honeywell’s fiscal 2024 fourth quarter, was mixed as sales came up short. Earnings per share edged out expectations at the midpoint. However, the company didn’t get much credit for the upward EPS revision because it came from so-called below-the-line items, factors that aren’t considered operational, like pension income and tax adjustments. Plus, these benefits were offset by what the company said were “reduced segment profit primarily driven by industrial automation and aero volumes,” which are certainly operational, demand-related issues. On a full-year basis, there were several revisions made to management’s outlook. Sales were revised lower because the short cycle recovery in the company’s industrial automation segment is not materializing as quickly as management was expecting. Short-cycle business demand has been the swing factor all year in terms of achieving guidance. Additionally, there were some unexpected delays in the UOP petrochemicals business in the energy and sustainability solutions segment, and manufacturing disruptions in Aerospace Technologies. While details were limited, Kapur did provide some more upbeat commentary on what he expects in 2025. Specifically, he guided all four operating segments — aerospace technologies, industrial automation, building automation, and energy and sustainability solutions — to realize organic growth and for the companywide segment margin to expand. (Jim Cramer’s Charitable Trust is long HON. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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