Honeywell Confirms Strength in Energy, Construction, and Infrastructure

Since they reported on Friday morning, all I’ve been hearing is “Caterpillar reported terrible numbers and so did Honeywell, undermining the global growth thesis, causing the massive 300+ selloff in the Dow.” Ok, I own CAT, which wasn’t pretty. I guess I’m just glad it didn’t take a 16% shallacking like it did same quarter last year (on my birthday no less!). Honeywell however, I thought was pretty darn good given headwinds such as the massive Dreamliner 787 delay and the housing recession. The headlines on Reuters reads: Honeywell sees subprime hitting industry-paper. Just had to tag on the word “subprime” to scare the bejesus out of investors. Interesting choice of highlighting this tiny tiny part of the whole conference call. Well, why don’t we focus on all the great things Honeywell did in this quarter and where we can look for opportunities? (I’ve already talked up Honeywell enough in my past posts and I continue to put my money where my mouth is, but we lets look at other related industries shall we?)

Yes, aerospace and defense continues to do great and the outlook is strong for the coming years.

“For the year, we anticipate aero sales of around $12.2 billion, up approximately 10% for the year; by the way reflects an increase of about $100 million from a previous estimate and we expect continued margin expansion in the fourth quarter at aero, and we expect full year margins for aero to expand 500 basis points from full year 2006 to just below 18%.”

But the business segments that really seemed to excite the management team were the ACS (Automation and Control Systems). The ACS industry is also the reason I had bought Johnson Controls a while ago, but swapped into Honeywell because JCI had too much auto exposure and no aerospace business. Here’s the management team’s summary of Honeywell’s ACS business this quarter:

“Sales for ACS were up 12% in the quarter, 11% organic, which includes 4% from foreign currency translation. We had positive growth across all the regions in ACS. And by the way, I think it’s notable, this is the 10th consecutive quarter of double digit reported revenue growth for ACS.

On the product side, we had particular strength in life safety and security, which continued to perform well benefiting from our strong global presence and also the robust demand in emerging regions. The solutions businesses continue to experience significant growth. They were up 18% in the third quarter. They are benefiting of course from strong energy retrofit projects and again also robust demand in markets, in refining commercial building as well as I have said energy retrofit.

The segment profit for ACS was up 13%. It’s a 10 basis point increase in margin to 11.7%. And when you do the math and we’ve discussed this with you on numerous times previously, when you do the math, it really is the mix impact, so volume and productivity loss by inflation and the very high solutions growth that nearly doubled or more than doubled solutions versus products growth in the quarter. So another great quarter for ACS, continued momentum and continued strong execution across the ACS portfolio.”

While we slowly ride the aerospace cycle, with an occasional pause to wait for Dreamliner deliveries, the ACS business is a great growth area for Honeywell and one of the top reasons I own the stock. Buildings in developed nations only get older. Now, more than ever, they have to be retrofitted and made more energy efficient with oil near all time highs. New buildings popping up all over China, Korea, South America, Europe, etc. all need to be energy efficient as well. Other plays in these areas include United Technologies’ (UTX) Carrier brand, American Standard (ASD)’s Trane brand, and Johnson Controls (JCI). The risk with these other players is they have more buisness in the hardware components of a building’s HVAC (heating ventilation air conditioning) systems such as air conditioning units and chillers. These, of course, require expensive materials, exactly the metals and materials that sacked Caterpillar this quarter.

A related play on energy efficiency, as I wrote about previously, is ABB. ABB not only builds power grids and innovates new ways to harness energy such as from the ocean. ABB also provides the automation and control that allows factories to be streamlined and efficient. Oh, and T. Boone Pickens owns ABB. I like that!

**Disclosure: author has positions in CAT, HON and ABB**

This entry was posted on Tuesday, October 23rd, 2007 at 10:03 pm and is filed under Engineering, Gov\'t & Utilities, Oil & Energy, Stocks, Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.