Will Honeywell (HON) Pull A Surprise This Earnings Season?

Industrial goods manufacturer Honeywell International Inc. (NYSE:HON) is scheduled to report second-quarter 2016 results before the opening bell on Jul 22. In the last reported quarter, earnings beat the Zacks Consensus Estimate by 3 cents. Over the trailing four quarters, the company delivered an average positive surprise of approximately 0.83%. Let’s see how things are shaping up for this announcement.

Key Factors in the Second Quarter

In second-quarter 2016, Honeywell expects revenues in the range of $40.3 billion to $40.9 billion. During the quarter, Honeywell unveiled plans to spin off its $1.3 billion resins and chemicals business into a standalone, publicly traded company called AdvanSix. This move came two months after it backed out of a $90 billion blockbuster bid to buy rival giant United Technologies Corp. (NYSE:UTX) after facing resistance from the target, antitrust regulators and key clients. Post spin-off, the new company will be a leading producer of Nylon 6, a polymer resin used to produce engineered plastics, filaments, fibers and films that are used in products such as automotive and electronic components, and also in food and industrial packaging.

During the second quarter, Honeywell also announced its plan to invest $100 million to expand its Asia-Pacific regional headquarters and R&D facilities in Shanghai, by purchasing a new headquarter building in the city.

Honeywell’s balanced mix of long- and short-cycle businesses has the potential to earn consistent above-average returns and mitigate operating risks. The company continues to launch products and technologies in order to drive organic growth and expand its business. In the to-be-reported quarter, the company unveiled AlarmNet 360, a new cloud-based management platform designed to drive business growth, simplify account management and streamline installations.

Given its international presence, the company often faces unfavorable foreign currency movements, impacting its top-line growth. With over 7,000 employees, the U.K. is one of the largest markets for Honeywell in Europe and remains an integral part of its plans for future growth in the region. The company generated $8,674 million revenues in Europe in 2015 out of an overall tally of $38,581 million, a sizable portion of which was registered in the U.K. Non-U.S. manufactured products and services, mainly in Europe and Asia, were 39% of total sales in 2015. With such an exposure, the company faces significant risks related to the Brexit referendum. In addition, Honeywell has to continually develop and maintain competitive products by adding innovative features that differentiate its products and prevent commoditization. These increase R&D expenditure and have often resulted in margin contraction and reduced bottom-line growth.

Earnings Whispers

Despite all attempts to restructure its business, our proven model does not conclusively show that Honeywell is likely to beat earnings this quarter as it lacks the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently at 0.00%.

Zacks Rank: Honeywell’s Zacks Rank #2 when combined with 0.00% ESP makes an earnings beat prediction uncertain.

On the other hand, Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

American Campus Communities, Inc (NYSE:ACC) has an Earnings ESP of +1.89% and a Zacks Rank #2. It is scheduled to report on Jul 25.

The Earnings ESP of Gilead Sciences Inc. (NASDAQ:GILD) is +6.91% and it has a Zacks Rank #2. The company is expected to report on Jul 25.

AK Steel Holding Corporation (NYSE:AKS) has an Earnings ESP of +16.67% and a Zacks Rank #2. It is expected to release results on Jul 26.