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Why Are Analysts Expecting Honeywell’s EPS to Rise in 4Q16?

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Analysts’ expectations on Honeywell’s adjusted earnings per share

As of January 20, 2017, Wall Street analysts expect Honeywell (HON) to post adjusted EPS (earnings per share) of $1.74 in 4Q16, a growth of 10.1% year-over-year as compared to $1.58 in 4Q15. In the first nine months of 2016, HON posted adjusted EPS of $4.79 compared with $4.52 in the first nine months of 2015, a growth of 6% year-over-year, which implies an increase in operating EPS of 7.0% for the first three quarters of 2016. Honeywell projects its fiscal 2016 earnings per share to be in the range of $6.60–$6.64.

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The expected growth in the adjusted earnings per share could be driven by continued restructuring benefits and cost reduction actions. Analysts expect Honeywell’s cost of goods sold to decline in 4Q16. As a percentage of sales, analysts expect the cost of goods sold to be 68.8% of the expected revenue in 4Q16, a reduction of 50 basis points year-over-year as compared to 69.3% in 4Q15.

Similarly, HON’s selling, general, and administrative expenses are expected to be at 12.2% of expected sales in 4Q16, a reduction of 110 basis points year-over-year as compared to 13.3% in 4Q15. Also, Honeywell has taken action to retire some of its high coupon bonds and issued new bonds that carry low coupon rates, which is expected to reduce the interest expense by approximately $60 million per year. However, the impact won’t be seen until 1Q17.

Share repurchase to impact EPS positively

In 3Q16, Honeywell bought back 2 million shares at the cost of $233 million under its $5 billion share repurchase program that was authorized in April 2016. At the end of September 2016, HON had $4.3 billion that could be used to buy back common shares in the future. It remains to be seen how many shares Honeywell bought back in 4Q16 to boost its EPS.

Investors can indirectly hold Honeywell by investing in the Industrial Select Sector SPDR Fund (XLI), which invests 4.5% of its holdings in Honeywell as of January 20, 2017. Other major holdings of this fund include General Electric (GE), 3M (MMM), and Union Pacific (UNP), which have weights of 9.5%, 5.2%, and 4.6%, respectively, as of January 20, 2017.

In the next part, we’ll look into analysts’ recommendations and targets for Honeywell ahead of its 4Q16 earnings release.

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