Honeywell plans higher growth investments even as first half of 2022 looks dicey

Honeywell International Inc. reported a strong fourth quarter. But sales missed expectations and analysts raised questions about planned increases in capital spending and R&D investments in the face of uncertainty in 2022.

CEO Darius Adamczyk and Greg Lewis , chief financial officer, told analysts that the first and second quarters will suffer from continued supply-chain issues, labor shortages and inflation as a hangover of the Covid-19 pandemic.

Expecting a rebound in the second half of the year, Honeywell says 2022 should bring increased sales, margins and adjusted earnings per share over 2021. But Adamczyk warned that is based on expectations that supply-chain issues will be largely resolved by the end of the first half of the year. He conceded it is hard to be sure about when supply disruptions and labor woes will ease.

“We’re bullish on improved supply-chain flow,” he told analysts on today’s conference call. “But what none of us know, and that includes Honeywell and others, is exactly what will happen in the second half.”

Edward Jones analyst Jeff WIndau says that same concern is heard from other industrial companies.

“I think everyone is feeling that the second half of the year is going to be returning to growth and a little more robust, but you want to make it through the first quarter or two before you really start predicting what the second half of the year will look like,” he says.

And that, along with a generally conservative forecast on improvements for 2022, naturally led to some concerns about spending plans for the coming year, Windau says, even though Honeywell (NYSE: HON) is credited with a “well-disciplined process for managing business and managing profitability.”

Honeywell expects to increase 2022 growth capital spending 25% from 2021, to as much as $1.2 billion. Research and development spending is expected to increase 15% to as much as $1.6 billion, and spending on new digital capabilities is projected at $1 billion for the year, up 10% from 2021.

Questioned about Honeywell’s use of capital and how long it would take to see returns on the increased investments, Adamczyk defended the plans.

“One thing we’re not going to do is not invest in the business when we have these kinds of growth opportunities,” he said. “The fact is these are attractive returns and, whether it’s quantum (computing) or sustainability technology solutions or others, … we’re investing in innovation which is differentiated (and) where we can capture value.”

“I hope the investors trust us that we make these investments that come to fruition generate returns, (but) they’re not instantaneous,” he said. “I’m very confident we’re going to be talking to you about the kind of top line we’re getting from sustainability technology solutions or quantum.”

For the quarter just completed, Honeywell reported $1.43 billion in net earnings, or $2.05 per diluted share, on sales totaling $8.66 billion. That compares with net earnings of $1.38 billion, or $1.91 per diluted share, on net sales of $8.9 billion in the fourth quarter of 2020.

After allowing for one-time gains and charges, Honeywell says adjusted diluted earnings came to $2.09 per share. That was higher than the $2.07 per share analysts had, on average, projected for the quarter.

But revenue for the quarter was lower than the $8.73 billion average for analysts’ estimates.

For the full year, Honeywell also beat earnings expectations. The company reported net income of $5.61 billion, or $7.91 per diluted share, on sales totaling $34.39 billion. Allowing for one-time gains and losses, that converts to adjusted earnings of $8.06 per diluted share. That was better than the $8.04 analysts had expected, although revenue again fell below the $34.46 billion they had forecast.

Lewis outlined the company’s guidance for 2022. He told analysts that sales would be 4% to 7% higher, reaching as much as $36.4 billion, with adjusted earnings per share of $8.40 to $8.70.

A large part of Honeywell’s increase in R&D investments will go to Quantinuum, the new name for the joint-venture combination of its own Quantum Solutions business and Cambridge Quantum Computing.

Honeywell invested $270 million in the venture, which is the largest quantum computing company in the world, after the deal closed late last year. It projects investing $200 million in operating expenses for the venture in 2022.

Adamczyk told analysts Honeywell expects to see annual sales from Quantinuum to reach $2 billion by 2026. That is a full year ahead of the schedule Honeywell laid out when it announced the deal last summer. It is an example, he said, of the returns that can be made in on Honeywell’s technology investments.“Quantinuum is […]

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