Will Lower Aerospace Revenues Affect Honeywell Q3 Earnings?

Technology and manufacturing giant, Honeywell International Inc. (NYSE:HON) is scheduled to report third-quarter 2017 results on Oct 20. In the quarter to be reported, the company anticipates weak revenues in Aerospace Business, which constitutes the major portion of total revenues.

Last quarter, the company reported earnings of $1.80, reflecting a beat of 1.7%. Overall, Honeywell pulled off an average positive earnings surprise of 2.1% over the last four quarters.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

In a bid to better positioned itself to leverage the shared business models and maximize share-owner value through focused strategic decision making, Honeywell has reorganized operating segments. However, the company’s proactive restructuring initiatives are yet to witness signs of stabilization in a number of its major end markets.

Particularly, Honeywell’s revenues for its Aerospace’s defense and space-related products and services remain vulnerable to changes in the U.S. government’s defense and aerospace funding. Further, the high research and development costs could also be a drag on this segment margin and affect its profitability in the upcoming quarter.

Notably, the Zacks Consensus Estimate for revenues from the Aerospace segment in the to-be-reported quarter currently remains low at $3,535 million compared with second-quarter revenues of $3,674 million. Revenues from Materials and Technologies segment are also anticipated to be low with estimate of $2,194 million compared with reported revenues of $2,239 million in the prior quarter.

Moreover, Honeywell remains susceptible to material price inflation, which in turn is expected to affect its operating profit and bottom-line growth for the third quarter. Further, high dependency on supply chain to scale production and adjusting delivery of long lead-time products during times of volatile demand remains matters of concern. High operating risks in one of the key ingredients of its business might reflect poorly on the upcoming quarterly results.

However, Honeywell’s balanced mix of long and short-cycle businesses, along with a decent organic growth in new products and expansion in high-growth regions augur well for the company. Additionally, the company is building a robust pipeline of new products. It has regularly fine-tuned portfolio, having sold about 60 of its units (accounting for $7 billion in sales) since 2002 and acquiring another 90 companies contributing $14 billion in revenues over the same period. These factors bode well for the company’s quarterly numbers and are anticipated to offset some of the risks it faces.

Furthermore, infrastructure investments and increasing gas consumption in high growth regions like India and China are expected to drive demand for the company’s acquired business Elster’s gas heating assets, strengthening its existing gas combustion portfolio.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for Honeywell this time around. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.74. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank:Honeywell has a Zacks Rank #2, which increases the predictive power of the ESP. However, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

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

Kemet Corporation (NYSE:KEM) has an Earnings ESP of +7.46% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Danaher Corporation (NYSE:DHR) has an Earnings ESP of +0.36% and a Zacks Rank #2.

Amphenol Corporation (NYSE:APH) has an Earnings ESP of +0.53% and a Zacks Rank #2.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>