It has been a tense couple of years for firms operating in the cyclical industrial and aerospace industries. But the best-run firms have used the downturn to become more disciplined with their businesses, cutting costs and preparing for an eventual economic upturn. Honeywell (NYSE:HON) fits firmly into this camp, and its second quarter results and outlook gave investors confidence that the company remains on the right track.

TUTORIAL: Analyzing Chart Patterns

Second Quarter Recap
Sales advanced 14% to $9.3 billion. Its largest segment is automation and controls, which grew almost 20% and weighed in at nearly 43% of quarterly sales and sells a wide array of sensors and controls, including devices to control air conditioning and water flow. Key competitors include Eaton (NYSE:ETN) and Emerson (NYSE:EMR). The next largest unit is aerospace and it posted 6.2% growth to account for 31% of sales. Aerospace competes with United Technologies (NYSE:UTX) and General Electric (NYSE:GE) by providing engines, systems and related avionic services. Specialty materials and transportation systems rounded out the four primary businesses and posted robust growth of 11.7% and 26.4%, respectively.

Segment profits grew 20.6% to $1.3 billion and improved across every division. Backing out corporate overhead, operating income jumped 43.4% to $1.1 billion and net income improved a similar 43.1% to $810 million, or $1.02 per diluted share.

Outlook
For the full year, analysts covering Honeywell currently expect sales growth in a range of $36.1 billion and $36.7 billion, or an increase of between 12 and 14% from 2010. Its earnings guidance is between $3.85 and $4 per share, or as much as 33% growth from last year.

The Bottom Line
Based on current guidance, Honeywell's sales and earnings are forecasted to exceed 2008 levels, meaning the credit crisis has cost its industrial-based businesses roughly three years of growth. However, free cash flows have improved over this period and should grow off the $3.6 billion, or $4.60 per diluted share they came in at last year.

Free cash flows tend to exceed reported earnings, meaning management is very savvy at keeping capital expenditures low and pushing through other efficiencies, such as working capital management. At a forward P/E of 14 and trailing free cash flow multiple of just over 12, the valuation is reasonable and represents an arguably solid entry point as Honeywell is well positioned to take advantage of an eventual and sustainable recovery in global industrial economic activity. (These decision-making tools play an integral role in corporate finance and economic forecasting. To learn more, see Using Decision Trees In Finance.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  6. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center