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Industrial conglomerate Honeywell (NASDAQ:HON) beat analysts' expectations in Q2 CY2024, with revenue up 4.7% year on year to $9.58 billion. The company's full-year revenue guidance of $39.4 billion at the midpoint also came in 1.6% above analysts' estimates. It made a non-GAAP profit of $2.49 per share, improving from its profit of $2.30 per share in the same quarter last year.
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Honeywell (HON) Q2 CY2024 Highlights:
- Revenue: $9.58 billion vs analyst estimates of $9.42 billion (1.7% beat)
- EPS (non-GAAP): $2.49 vs analyst estimates of $2.42 (3.1% beat)
- The company lifted its revenue guidance for the full year from $38.5 billion to $39.4 billion at the midpoint, a 2.3% increase
- Gross Margin (GAAP): 38.9%, in line with the same quarter last year
- Free Cash Flow of $1.11 billion, up from $215 million in the previous quarter
- Organic Revenue rose 4% year on year (3% in the same quarter last year)
- Market Capitalization: $139.1 billion
Originally founded in 1906 as a thermostat company, Honeywell (NASDAQ:HON) is an aerospace and defense manufacturing company building technologies, performance materials, and safety and productivity solutions.
General Industrial MachineryAutomation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales GrowthExamining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Honeywell's sales were flat. This shows demand was soft and is a tough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Honeywell's annualized revenue growth of 4.1% over the last two years is above its five-year trend, but we were still disappointed by the results.
We can dig further into the company's sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Honeywell's organic revenue averaged 5% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company's core operations (not M&A) drove most of its performance.
This quarter, Honeywell reported reasonable year-on-year revenue growth of 4.7%, and its $9.58 billion of revenue topped Wall Street's estimates by 1.7%. Looking ahead, Wall Street expects sales to grow 7.3% over the next 12 months, an acceleration from this quarter.
Operating Margin Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Honeywell has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 20.8%. This isn't too surprising as its gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Honeywell's annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.
In Q2, Honeywell generated an operating profit margin of 20.7%, down 2.2 percentage points year on year. Since Honeywell's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because its general expenses like sales, marketing, and administrative overhead increased.
EPS Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Honeywell's EPS grew at an unimpressive 4.4% compounded annual growth rate over the last five years. This performance was better than its flat revenue but doesn't tell us much about its day-to-day operations because its operating margin didn't expand.
Diving into the nuances of Honeywell's earnings can give us a better understanding of its performance. A five-year view shows that Honeywell has repurchased its stock, shrinking its share count by 8.6%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Honeywell, its two-year annual EPS growth of 10.4% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q2, Honeywell reported EPS at $2.49, up from $2.30 in the same quarter last year. This print beat analysts' estimates by 3.1%. Over the next 12 months, Wall Street expects Honeywell to grow its earnings. Analysts are projecting its EPS of $9.89 in the last year to climb by 8.3% to $10.72.
Key Takeaways from Honeywell's Q2 Results We were impressed by how significantly Honeywell blew past analysts' organic revenue expectations this quarter. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates. On the other hand, its full-year EPS forecast was underwhelming, implying its incremental revenue will be less profitable than expected. Overall, we think this was a good quarter, but the market was likely hoping for better profitability. The stock traded down 5.9% to $201 immediately after reporting.
