Honeywell International Inc. tumbled the most in more than a year after reporting preliminary third-quarter profit below its forecast and cutting the top end of the 2016 earnings target as sales slump for aircraft parts.
The shares fell 7.5% to $106.91 at 10:58 a.m. in New York, after dropping as much as 8.7%, the largest intraday decline since August 2015. Honeywell’s slide was the third-biggest on the Standard & Poor’s 500 Index. Shares had gained 12% for the year through Thursday.
Honeywell’s prediction that the business-jet market will remain weak next year fueled declines at other aerospace manufacturers such as Textron Inc., which produces helicopters and Cessna jets; General Dynamics Corp., the maker of Gulfstream jets; and United Technologies Corp., whose Pratt & Whitney unit makes engines.
“In the third quarter, we continued to see slow growth across much of our portfolio,” Honeywell Chief Financial Officer Tom Szlosek said in a conference call with analysts on Oct. 7.
Emerging Markets
Slumps in emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell’s unit that sells jet engines, cockpit controls and other aerospace parts. Third-quarter aerospace sales dropped 6 percent to about $3.6 billion and the weakness will spill into 2017, Szlosek said.
Weakness in business-jet demand is spreading to regions such as North America and Europe, Szlosek said. That adds to weak sales in Russia because of economic sanctions; the Middle East, which is suffering from lower oil prices; and “campaigns in China to avoid any semblance of luxury in business travel,” he said.
“We’re also seeing corporate flight departments in developed regions cutting back on equipment, usage and services,” he said.
An Overreaction?
The forecast cut was “disappointing,” said Jeff Windau, an analyst at Edward Jones & Co. Still, investors may be overreacting to all the changes Honeywell announced at once.
“Honeywell has been operating very well in a difficult industrial environment,” he said. “While this quarter and maybe next quarter look to be a little bit worse than anticipated, we still believe they’re well positioned long term to benefit from growth opportunities.”
Honeywell’s third-quarter earnings will be about $1.60 a share, according to a company statement after the close of trading Thursday. That fell short of the previous forecast of $1.67 to $1.72. Honeywell lowered the upper end of its 2016 profit target by six cents to $6.64 a share. The Morris Plains, N.J.-based company is set to report earnings on Oct. 21.
Corporate Reorganization
Amid the slow growth, Chief Executive Officer Dave Cote has been shaking up his company, selling an aerospace government-services business on Sept. 16 and spinning off a resins unit on Oct. 1. Those two businesses together have annual sales of about $1.3 billion and add 14 cents a share to earnings. The company also split Automation and Control Solutions into two units.
Honeywell adopted new accounting rules that boosted earnings by 14 cents a share this year through the end of September. The gains from the divestitures and accounting change were applied to cost-cutting programs that will create annual savings of as much as $225 million, Honeywell said.
The savings will help the company target 2017 earnings growth of more than 10 percent, excluding the divestitures, and an increase in profit margin of as much as 75 percentage points. Honeywell expects sales from existing business to post “low single digit” growth.
By Thomas Black
