Overall Solid Results for an Industrial

Honeywell (HON) reported earnings this morning that were essentially in line at $1.24 a share against the $1.23 consensus and with revenues slightly below at $9.65 billion vs. the $9.9 billion consensus.

The company lifted the low end of earnings guidance to $4.90-4.95 a share from $4.85-4.95 for the full year, which compares to the $4.95 consensus. It lowered its full-year revenue forecast to $38.8-$39 billion from $38.9-$39.3 billion, which is mostly coming from lower defense and space results.

Free cash flow guidance was in line at $3.7 billion and will be flat y/y due to the planned capex increase of $300 million for the year. Fourth-quarter implied guidance is for continued 3-5% organic growth and continued margin expansion. Productivity was a clear positive call out and something we've come to expect from this management team. Margins were better than expected at 16.7%, up 110 bps y/y and across most segments with notable strength in aerospace and automation and control solutions (ACS), two of the key drivers for the stock in 2014.

By division:

Aerospace (32% of total revenues) sales fell 2% y/y (expectations were 1-3% growth), primarily driven by the 11% drop in defense (expectations were for mid-single-digit declines), which was partially offset by the 3% growth in commercial OEM and 5% growth in aftermarket. Part of the defense decline was timing shipments, which should reverse part of the declines in the next 3-9 months (we will listen for this on the call), but management did lower its 2013 and 2014 growth forecasts as a result of the disappointing 3Q results. On the commercial aero side, the company indicated that it continues to see flight-hour growth and this bodes well for the aftermarket business visibility. And operating margins in aerospace rose to 20.2%, up 90 bps y/y and were ahead of plan.

ACS (42% of total revenues) sales rose 4% with organic sales up 3% and were in line with expectations. As expected, growth came from energy, safety and security, with strong results in residential markets and improving commercial retrofits. Margins rose 90 bps y/y to 15.3%.

Performance, materials and technologies (PMT) (16% of total revenues) sales rose 10%, but fell 1% organically with weakness in advanced materials (this unit has seen five-consecutive quarterly declines). The bright spot was that UOP backlog increased 18% y/y ahead of expectations vs. 10% last quarter.

Transportation (9% of total revenues) sales rose 6% and 5% organically (double expectations) on new platform launches and higher turbo gas market share. Margins in this segment rose 190 bps y/y to 14%.

The company continues to deliver solid results, with the exception of its defense segment, which has deteriorated. But that appears to be a timing issue. Margins continue to drive higher earnings and are the reason why management is able to continuously able to increase guidance in the face of a tough macro environment. We like its end-market exposure to key themes we've sponsored all year: aerospace, turbo, energy efficiency. We see opportunities for the company to eventually post higher revenue trends ahead as the global economies improve.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long HON