This week we received some encouraging comments out of two bellwethers on the global industrial economy. As we outlined in our Best Ideas Newsletter, we continue to believe that the
Honeywell issued its 2012 financial outlook this week indicating that sales will expand 4% to 7% (4% to 6% organic) despite some weakness in Europe and
Honeywell noted that free cash flow conversion will be strong at 100% of net income in 2012, and it will pull in about $3.5 billion in free cash flow for the year (excluding pension funding). Supporting this growth forecast is Honeywell’s long-cycle backlog (~$16 billion) and solid order growth at UOP, Process and Building Solutions, and Commercial Aerospace. We view this as yet another data point that the commercial aerospace cycle will remain strong in coming years in the face of any global economic uncertainty.
Interestingly, management noted the following regarding trends in
“From the data indicators we’re watching, it’s pretty clear that we’ll experience European recession in 2012. I think most economists would say euro land is today — has actually entered into a recession. And this is reflected in our current orders and our sales outlook, principally in our short-cycle businesses, which comprise 60% of our sales in
We firmly believe that Europe will pose a headwind for domestic multi-nationals but will only impact the pace of growth (as in the example of Honeywell’s forecasts above) and not cause major declines in revenue and earnings trajectories for the strongest companies. In fact, Honeywell noted on its outlook conference call, it expects GDP to grow as much as 2% in the developed world (including a European slowdown), while output in emerging markets will advance as much as 6%, resulting in global GDP growth in 2012 of about 3%.
Consistent with continued expansion, United Tech expects its 2012 guidance for earnings per share, excluding its recent acquisition of Goodrich, to come in between $5.80 and $6 per share, up 6% to 10% over this year’s performance. Including Goodrich, earnings are expected to reach $5.50 per share, but should expand considerably in 2013 as the acquisition becomes accretive. The industrial conglomerate also indicated that it expects organic growth to be as high as 4%, with revenue, excluding Goodrich, to hit as high as $60 billion in 2012. Including Goodrich, it thinks revenue will reach $64 billion, above consensus expectations. We are maintaining our fair value estimate for United Tech.
United Tech expects 2012 to be a transformational year as it digests aerospace-supplier Goodrich and deals with moderate economic growth, with strength coming primarily from emerging regions. Supporting our thesis on the commercial aerospace cycle, United Tech expects its acquisition of Goodrich to present the firm with a tremendous opportunity in coming years (namely 2013) as aircraft production ramps up.
Here’s what management had to say on its outlook conference call regarding the economic environment:
“You know, in 2011, world GDP growth was led by emerging markets. Certainly, I’m here to say that 2012, this trend will continue. That’s where we see the strong momentum. But even there, with strong, it’s moderating growth, as certainly in some of these emerging markets. And across the globe, we’ll see uneven growth in 2012. The world GDP estimates have recently been revised as you know, downward, 2.9%, but I’ll say this. Even this, at this point, given everything going on perhaps, (we) feel optimistic. And we’re planning for slow growth in Europe and
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