Uncertainty could freeze Honeywell’s investments in the EU
After the results of the Brexit vote, Honeywell (HON) maintained that the near-term impact of the event would be minimal. The company derives 4% of its sales from the United Kingdom and 18% of sales from the rest of Europe.
The company has maintained its euro currency hedges at $1.10 to protect its 2016 profits. The company’s core organic sales in the Eurozone (or EU) have been positive so far this year. However, given that determining the conditions of the United Kingdom’s exit could be a long, drawn out process, the uncertainty associated with the process could slow economic growth in the United Kingdom and the EU and affect Honeywell in the long run.
The company has therefore stated its intention to stay guarded regarding further investments in the region and to be flexible enough to quickly adjust its cost structure with regards to the supply chain as the need arises. Investors interested in reading about the impact of British trade deals on industrial (IYJ) conglomerates such as General Electric (GE) and United Technologies (UTX) can read What’s the Impact of Brexit on Industrial Conglomerates?
Honeywell 2017 currency hedges
Honeywell has maintained hedges against the most important short-term impact from the realization of Brexit: negative currency translations. The company has hedged ~75% of its 2017 euro profit and loss exposure at $1.15.
The euro is currently trading at $1.10. Honeywell has also hedged 50% of its British profit and loss exposure at $1.44. Hedging benefits could be substantial with the British pound. It’s currently trading at $1.31, and should the British economy deteriorate further than is currently anticipated, the pound could weaken even further.