HON Honeywell International Inc

By Ted Mann 

Honeywell International Inc. said an unexpectedly weak September prompted its forecast for lower annual sales, which spooked investors in the aerospace-and-building systems conglomerate.

Chief Executive Dave Cote told investors Friday morning that sales in areas such as aftermarket services for business-jet engines and hand-held scanners for shippers and logistics companies "failed to materialize" in the third quarter, requiring the company to cut its targets for earnings and annual sales.

"We expected short-cycle orders that normally materialize," Mr. Cote said. "They usually do, but in this case, they didn't."

Honeywell shares fell 7.5% Friday, pressuring shares of other industrial players, including General Electric Co. and United Technologies Corp.

The announcement, issued late Thursday, was "uncomfortable," Mr. Cote said on a conference call. But the company remains confident in its direction for the long term, he said, and executives say they have weathered some of the headwinds, including weakness in its business linked to oil refining and chemicals.

"This is the bottom" for Honeywell businesses exposed to the oil and gas industries, Mr. Cote said, even as he cautioned troubles in the business-jet industry "will get worse" next year.

Sales related to business jets were hurt by a variety of factors, executives said, including slowing growth in emerging regions including the Middle East, Russia and China. Chief Financial Officer Tom Szlosek said an anticorruption campaign in China has blunted the market for luxury goods such as private aircraft.

Honeywell's announcement came amid other changes it reported ahead of its third-quarter earnings release, scheduled for Oct. 21, including a reorganization of a business unit and the integration of an acquisition that sells automation systems to warehouse operators.

Morgan Stanley analyst Nigel Coe, who derisively compared Honeywell's announcement to a "paella bowl" dropped in front of investors, said "credibility is becoming a growing issue." In a research report, he asked: "Can we be sure that the wound has been cauterized?"

The Morris Plains, N.J.-based conglomerate now says its so-called core sales, which exclude acquisitions or divestitures, will likely fall 3% in the third quarter and between 1% and 2% for the year. The company lowered the upper end of its 2016 adjusted earnings target by six cents to $6.64 a share.

In addition to the business-jet weakness weighing on third-quarter results, ales, Honeywell is taking a $140 million charge for sales incentives that will get the company's aerospace systems included on new aircraft.

Those incentives to lock in business are "painful to do," Mr. Cote said. "You take a short-term hit for it, but I really think it sets you up for a long time to come."

Honeywell has been a Wall Street darling over the last half-decade, seeming to perfect a strategy of small- to midsize acquisitions. The company prides itself on integration and has earned the right -- in the view of many bullish analysts -- to function as a throwback conglomerate, with product offerings that range from jet engines to chemical catalysts for oil refining to thermostats and rubber boots.

The steadiness of that model, along with a strong record for meeting and beating Wall Street expectations, is key to the legacy of Mr. Cote, who is scheduled to retire as CEO in March. Mr. Cote will be succeeded by Darius Adamczyk, who joined the company in 2008. Mr. Cote is to stay on as executive chairman through 2018.

Mr. Adamczyk didn't appear on Friday's conference call. In response to an analyst's question, Mr. Cote said Mr. Adamczyk had been "fully involved" and the corporate strategy in place when he takes over would be "consistent with what we're saying today."

Mr. Cote's final months have included some moves that struck observers as out of character, especially an unsuccessful $90 billion takeover bid for United Technologies, one of its chief aerospace industry rivals. United Technologies rebuffed the bid, saying neither customers nor regulators would allow it, and Honeywell in March said it was walking away from the bid.

Honeywell's 7.5% decline Friday to $106.94 was the stock's biggest one-day drop since Aug. 10, 2011, when it fell 7.6%.

Still, some analysts expressed confidence in the company's long-term trajectory. The lowered forecast announced Thursday seems bad compared with Honeywell's recent performance but is "not catastrophic," JP Morgan analyst Stephen Tusa wrote in a note to investors. Honeywell's profits are off about 5% since the beginning of the year, which is roughly in line with its industrial peers, he said.

Write to Ted Mann at ted.mann@wsj.com

(END) Dow Jones Newswires

October 08, 2016 02:47 ET (06:47 GMT)

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