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Tickers in this Article: HON, GE, DHR
In its third quarter, technology and manufacturing giant Honeywell (NYSE:HON) earned $719 million or 97 cents per share. That's up sharply from the $618 million, or 81 cents a share, it put up in the same period last year. It was also an impressive two cents ahead of what analysts had been looking for.

If the story ended right there, this would be a great investing opportunity. Unfortunately, for Honeywell investors the recent earnings release is just the prologue.

Bleak Q4 Guidance
Honeywell beat out analyst estimates thanks to strong top line. Revenue came in at about $9.3 billion versus roughly $8.7 billion in comparable period last year. I was pretty happy with the numbers.

But all good things must come to an end, and for Honeywell that end comes in the fourth quarter. The company now thinks it's going to earn 97 cents-$1.01 per share in Q4. The Street expected $1.04 per share. Evidently it's tough to sell turbo chargers during an economic slowdown. Though it may seem like a small decrease, I think this forecast is a big problem.

I think many institutional investors will take a hard look at their portfolios in the coming weeks and will make changes heading into 2009, and when it comes to Honeywell, I think that some existing players could bail. Why hold on at this point? The fourth quarter is going to be weak, and the stock is trading near its 52-week low. Honeywell will likely be a window dressing casualty. (To learn more, read Can Earnings Guidance Accurately Predict The Future?)

We can also expect the sell side ratchet down their ratings and forward-looking earnings expectations because of the news. Even if we don't see any massive downgrades, I doubt the company will be getting much in the way of favorable coverage given its less than stellar near-term prospects. Existing shareholders may start to abandon ship and i doubt the company will be attracting new investors to replace them. (For more on analyst expectations, read Analyst Forecasts Spell Disaster For Some Stocks.)

The other risk for Honeywell is that it could be lumped in with others diversified conglomerates like GE (NYSE:GE) or Danaher (NYSE:DHR). If these companies continue to struggle, it could be a case of guilt by association for Honeywell.

Possible Happy Ending?
In the release, Honeywell also forecast 2008 sales of $37.2 billion, up 8% and narrowed its earnings per share range to $3.76-3.80. That's an increase of 19-20% versus last year's earnings, but it's also below the Street expectation $3.81 per share.

This is yet another weaker-than-expected estimate, but for a stock that can be had for under $30 and sports a dividend, that's not too shabby.
For next year, the Street is looking for Honeywell to earn $4.13 per share. Now the rub here is that I don't know if that number is doable especially if the economy continues to head south, but even if analysts are wrong by 50%, and it earns just $2 and change per share, that's not too bad either in my book. Not to mention that it had about $12.92 in share owner's equity a share by my math. This should help protect the downside potential.

Honeywell also generates decent cash. In 2008 free cash flow is expected to be approximately $3.2 billion , with cash flow from operations of $4.1 billion. Very simply, this is an attractive feature considering the lending environment.

Bottom Line
Honeywell's Q3 earnings were solid, but the outlook for the fourth quarter is an issue that hurt near-term price action in the stock. In short, I plan on steering clear for now.

That said, I do think that the company has excellent longer-term earnings prospects. I plan on revisiting this idea possibly in December when we will get a better idea of what to expect in 2009.

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