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Honeywell’s Earnings: Defy Estimates despite Lower Margins

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Honeywell’s sales

In previous series, we recommended that investors keep a close watch on risks related to Honeywell’s (HON) top line. Fortunately, the last quarter’s results eased fears. Sales grew for the first time in five consecutive quarters to $9.5 billion, a rise of 3.3% year-over-year. Revenues beat consensus Wall Street estimates by ~$150 million. Top-line growth was primarily due to core organic growth of 1% and contributions from the acquisition of Elster.

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Honeywell’s earnings

Honeywell’s (HON) adjusted earnings per share grew 9% year-over-year to $1.53 in 1Q16 and topped street estimates by 3 cents. Earnings per share rose as higher sales and lower diluted shares outstanding offset a drop in segment margins. Assuming dilution, the weighted average number of shares outstanding fell by 2.1% to 776.9 million in 1Q16. The company repurchased ~9.6 million shares in the first quarter at a price of $104. The timing of the repurchase could be termed opportunistic, given that the stock is now trading ~10% higher at ~$114.

Acquisitions and building solutions sales weigh on margins

In 1Q16, the company’s segment margins came in lower than expected and fell by 60 basis points year-over-year to 18.1%. The drop in margins was due to the dilutive impact of acquisitions in the ACS (Automation and Control Solutions) and Aerospace units. Excluding mergers and acquisitions, segment margins were up 20 basis points from the prior year’s quarter to 18.9% in 1Q16, illustrating impeccable operations within the conglomerate. The drop in segment margins was also due to higher-than-expected sales in the buildings solutions and distribution business in the ACS unit and original equipment sales in the Aerospace (ITA) segment.

Investors interested in trading in the industrials sector could 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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