Do Honeywell's Bad Earnings Make it a Good Buy?

Honeywell HON reported a loss in operating income of $578 million due to pension-related costs, compared to a gain of $543 million on the previous year. Stocks were down nearly 2% in pre-market trading on the news. Despite the loss, sales were up 8% for the quarter, with the company's Organic segment growing the most at 7%. The company's sales of $9.5 billion for the quarter set a new record and sets an EPS of $1.05 if not adjusted for pension costs. The company cannot ignore those costs, however, which skyrocketed from $471 million to $1.8 billion between 4Q 2010 and 4Q 2011. Segment profit, which reached record levels at $1.43 billion, could not keep up. The pension costs are the result of a mark-to-market accounting adjustment in which the value of the company's pension liabilities were adjusted to reflect their current fair market value. Excluding this one-off charge, the company beat earnings expectations of $1 per share and saw its EPS climb 14.9% on last quarter's earnings of 87 cents per share. The figures suggest that Honeywell's business model is thriving--an impressive feat at a time when defense spending is facing the crucible. The company has been able to consistently win contracts in the Middle East through its subsidiaries such as UOP, whose refinery technology won it a contract to improve diesel and lubricant production in Pakistan. Extensive growth in the company's Performance Materials and Technologies group, which saw a jump in sales of 24% for Q4 2011 and 20% for the year, has made this a particularly attractive arm of the company. A strong rise in profit margins in this arm of the company to 18.4% for the year (compared to 15.8% on the previous year) reaffirm the growth in this sector. The company's focus on logistical and industrial support services helped its earnings skyrocket in 2011, from 47 cents per share in Q4 2010 to $1 in Q2 2011, while the company's growth in aerospace solutions are also a good sign. However, increased competition from Lockheed Martin LMT, Boeing BA, and Raytheon RTN may limit Honeywell's growth in this sector in the future. On the other hand, Honeywell's work in civilian aircraft development helped it secure an $11.3 billion contract with Commercial Aircraft Corporation of China, which is not an option for Raytheon and Lockheed Martin, whose focus on military aerospace limits its international market. However, Honeywell is a solid performer, and its steadily increasing dividends make it a solid income play. The loss in stock value on the earnings might translate into a good opportunity to jump in and start collecting dividends. At a yield of 2.6%, dividends with Honeywell are currently better than what Boeing, although it is still far behind Lockheed Martin's impressive 4.85% yield, or even Northrop Grumman NOC, which offers a dividend of 3.37%.