Honeywell's strong quarter pushes shares up despite mixed guidance
Investing Club holding Honeywell International (HON) reported strong first-quarter results before the opening bell Friday. Bottom line It was an all-around great quarter from Honeywell, whose stock was being rewarded with an over 4% gain in Friday trading. Guidance was a bit mixed, but we believe management is being prudent due to the suspension of Russian operations, ongoing inflationary pressures, and continued uncertainty posed by supply chain challenges. The quarter once again demonstrates not only management's ability to navigate this difficult operating environment but also speaks to the pricing power Honeywell's offerings demand. The ability to pass on higher costs is a crucial factor against a backdrop characterized by rampant inflation and something that helped the team expand margins versus the year ago period. Companywide Q1 results Revenue at Honeywell rose 1% year over year to $8.38 billion for the quarter, exceeding expectations of $8.28 billion. Adjusted earnings of $1.91 per share outpaced expectations of $1.85. Segment margin of 21.1% rose 10 basis points year-over-year, edging out the 21% consensus. The backlog at the end of the quarter — agreements for sales to be realized in future periods — increased 9% year over year to $28.5 billion. On the post-earnings call, management said the pace of backlog growth has been "accelerating consistently over the last two years as our end markets recover." They added that the upswing is giving them "confidence in increased sales growth as the supply chain environment eases." Notably, the backlog growth would have been 10% if not for a $300 million that was removed from as a result of the Russia-Ukraine conflict. Honeywell generated operating cash flow of $36 million and free cash flow of $50 million, missing expectations of $1.16 billion and $881 million, respectively. While these are not the cash flow numbers we have come to expect from Honeywell, the first quarter is seasonally the lowest for the company. It was exacerbated this time around by ongoing supply chain challenges and strong collections in the prior quarter. Management's full-year free cash flow guidance was reaffirmed (more on that later). Despite the low cash flow in the quarter, Honeywell's strong balance sheet allowed management to deploy $2 billion during the quarter — half of which went to share repurchases. Management plans to repurchase $4 billion worth of shares total in 2022. The remainder of that allocation went to dividends and capital expenditures as well as merge and acquisition activity. Guidance Looking ahead, management provided both second-quarter and updated full-year 2022 guidance. Starting with the second quarter, management forecasts sales of $8.5 billion to $8.8 billion, a tad short of the $8.73 billion consensus at the midpoint. Management expects Q2 earnings of $1.98 to $2.08 per share versus, which at the $2.03 midpoint was a penny short of versus expectations. Segment margin is expected to come in between 20.5% and 20.9%, below the a 21.2% consensus coming into the print. For the full-year management nudged up the low end of sales guidance, forecasting sales of between $35.5 billion to $36.4 billion versus a $36.04 billion consensus. Adjusted per-share earnings were guided to a range of $8.50 to $8.80, outpacing the $8.60 expected, at the midpoint. Regarding the top line, that target represents organic growth of 4% to 7% — or a higher range of 6% to 9%, excluding the impact of a decline in Covid-driven mask sales and lost Russian sales. Additionally, full-year segment margin is expected to come in between 21.1% and 21.5%, unchanged from previously provided guidance and 10 to 50 basis points higher than a year ago. However, that projected ranged was short of the 21.8% the Street was looking for. Excluding the impact of Quantinuum — a previously announced business combination between high-powered computing Honeywell Quantum Solutions and Cambridge Quantum — segment margin is expected to expand between 40 and 80 basis points year over year. Full-year free cash flow is expected to come in between $4.7 billion and $5.1 billion versus a $4.98 billion consensus. Excluding the impact of Quantinuum, free cash flow is expected to come in between $4.9 billion and $5.3 billion. Assumptions making up the full-year guide, by segment, are as follows: Aerospace High-single-digit organic growth Continued growth in commercial flight hours A narrowbody airline recovery and new business platforms leading to "strong original equipment demand" Stable U.S. defense budget and higher international defense budgets Honeywell Building Technologies High-single-digit to double-digit organic growth Ongoing return to public spaces Stable non-residential construction spending and an increase in infrastructure spending Pricing power and cost control initiatives to offset inflationary pressures Quantinuum Mid-to-high single-digit organic growth Advanced materials pricing tailwinds, capacity expansion Positive orders momentum in automation and sustainability solutions Suspension of Russian operations will be a headwind, however, higher energy industry capex may offer some offset Safety and Productivity Solutions Roughly flat organic growth Strong demand in productivity solutions/services, advanced sensing technology and gas detection Sequential margin improvement for Intelligrated, Honeywell's warehouse automation offering, as management increases their focus on efficiency and profitability following a period of high growth Headwind posed by reduced mask demand before normalization in the second half. Segment Q1 results Aerospace Sales: $2.75 billion versus $2.74 billion expected Organic Growth up 5% year over year Operating Income: $753 million versus $777 million expected Segment Margin: 27.4%, down 160 basis points year-over-year Within the segment, Honeywell also realized a greater than 25% annual increase in commercial aviation aftermarket sales. On the other hand, the supply chain remains challenged. Lastly, the segment margin contraction comes as a result of a less favorable sales mix and difficult comparison due to a one-time gain in 2021. Honeywell Building Technologies Sales: $1.43 billion versus $1.36 billion expected Organic Growth up 8% year over year Operating Income: $336 million versus $299 million expected Segment Margin: 23.5%, up 100 basis points year-over-year Within the segment, management called out double-digit sales growth in building products and strong demand for Healthy Buildings solutions. The backlog continued to grow in building solutions projects and services. Notably the team said they're seeing some supply chain improvement here. Margin expansion came thanks to strong pricing power, though this was partially offset by ongoing inflation. Performance Materials and Technologies Sales: $2.45 billion versus $2.4 billion expected Organic Growth up 6% year over year Operating Income: $510 million versus $478 million expected Segment Margin: 20.8%, up 230 basis points year-over-year Within the segment, management noted a 16% organic increase in advanced materials and "strong pricing power across the portfolio." Profitability benefited from pricing power and a favorable sales mix, partially offset by inflation. Safety and Productivity Solutions Sales: $1.74 billion versus $1.77 billion expected Organic Growth down 15% year over year Operating Income: $253 million versus $229 million expected Segment Margin: 14.5%, up 20 basis points year-over-year Management noted double-digit growth in productivity solutions and services, advanced sensing technologies, and gas detection despite ongoing supply constraints. Reduced Covid-related mask demand was a headwind. Margin expansion was realized as strong pricing power and a favorable sales mix was able to more than offset lower volume leverage and inflation. (Jim Cramer's Charitable Trust is long HON. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Honeywell International Inc. signage is displayed on a monitor on the floor of the New York Stock Exchange (NYSE) in New York. Michael Nagle | Bloomberg | Getty Images