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Honeywell Automation: New Products Driven by a Settled Base

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Honeywell Automation outlook in the medium term

Honeywell Automation and Control Solutions made $14.1 billion in sales in 2015. The company expects sales to rise $15.3 billion–15.8 billion in 2016 with a core organic growth of 1%–2%. The initial outlook for 2017 sales is $16.3 billion–$16.6 billion. About 66% of the segment is exposed to the construction and housing sector (XHB). The remaining 34% is exposed to the industrials sector (XLI). Honeywell foresees an expansion of 110 bps (basis points) to 140 bps in 2016, or 16.3%–16.6%. Margins are expected to settle between 16.6% and 18.3% by 2018.

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Acceleration in new growth platforms

Honeywell has a massive installed base in its ACS (Automated and Control Solutions) unit. New product launches get to leverage this installed base and don’t exactly start from ground zero. The new connectivity and software solutions that offer high margins have received wide traction, and smart meters continue to outperform within the unit. The accrual of benefits from the integration of Elster, which plays out in the $12 billion metering industry, also presents significant upsides going forward as smart meters are increasingly rolling out in the United States and Europe.

Growth story in China

In Honeywell’s upcoming earnings release, you may want to look at possible Chinese overtones in the ACS growth story. Priorities in China’s 2016 fiscal policy present substantial upsides. The fiscal policy is widely expected to drive investments in consumption and high-value innovative automation products in which Honeywell could play a key role.

You can read about Honeywell Automation in Parts 7 and 8 of our series Why Investors Are Sweet on Honeywell.

Investors interested in trading in the industrials sector can look into the Industrial Select Sector SPDR ETF (XLI) and the iShares US Industrials ETF (IYJ). Major holdings in IYJ include Honeywell (HON) at 3.3%, 3M (MMM) at 3.9%, and General Electric (GE) at 11.5%.

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