Honeywell’s 2026 Earnings Outlook: Growth Amid Transition

Honeywell International ((HON)) has held its Q4 earnings call. Read on for the main highlights of the call.

Honeywell International Strikes Optimistic Tone Despite Pockets of Weakness in 2026 Outlook

Honeywell International’s latest earnings call struck a generally upbeat tone, with management emphasizing strong order momentum, record backlog, solid earnings and cash generation, and a clearly articulated roadmap through 2026. While executives acknowledged pressure in certain businesses—most notably petrochemical catalysts and short‑cycle industrial automation, particularly in Europe and China—the overall message was that robust demand in aerospace and building automation, combined with disciplined capital allocation and portfolio simplification, should support steady growth and expanding margins over the next two years.

Surging Orders and Record Backlog Underpin Future Growth

The company’s strongest proof point for a constructive outlook came from its order book. Orders rose 23% organically in the fourth quarter, pushing total backlog above $37 billion, up 15% year over year to a new record. Management framed this as a central pillar for 2026 growth, highlighting that a significant portion of the backlog consists of long‑cycle projects that are expected to convert into revenue over the next 12–18 months. While this concentration in long‑cycle work does introduce timing risk, Honeywell argued that the breadth and durability of demand provide a solid foundation for conversion-driven revenue and margin expansion.

Revenue Growth Beats Guidance on a Strong Q4

Top-line performance closed the year on a strong note. Fourth-quarter sales rose 11% organically, or 6% when excluding the Bombardier agreement signed for 2024, reflecting broad-based strength in key franchises. For the full year 2025, organic sales increased 7% (6% ex‑Bombardier), surpassing the high end of the company’s original guidance range by two percentage points. Honeywell emphasized that this beat was not solely driven by one-off items, but by sustained demand in aerospace and building automation, with other areas like process automation and industrial automation more mixed.

Earnings and Free Cash Flow Outperform Expectations

Honeywell translated sales growth into notable bottom-line gains and cash generation. Adjusted EPS for Q4 came in at $2.90, up 17% year over year, or down a modest 3% when excluding the Bombardier benefit. For the full year, adjusted EPS reached $9.78, up 12% (7% ex‑Bombardier). Cash performance was particularly strong: free cash flow rose 48% in Q4 to $2.5 billion (13% growth excluding Bombardier) and climbed 20% for the year to $5.1 billion (7% ex‑Bombardier). Management underscored that this cash performance gives the company flexibility to fund investments, service debt, and support shareholder returns heading into the separation of its aerospace business.

Aerospace and Building Automation Lead Segment Performance

Aerospace and building automation remained the main profit engines. Aerospace organic sales increased roughly 11% in Q4 excluding Bombardier, with the segment delivering a 26.5% adjusted margin—up 40 basis points sequentially and demonstrating pricing power and mix improvement. Building automation also posted solid results, with organic growth around 8%, split between 9% growth in solutions and 8% in products, and segment margins close to 27%, up about 20 basis points year over year. These two businesses are central to Honeywell’s narrative of durable, long‑cycle growth and are expected to remain core value drivers even as the broader portfolio is reshaped.

Margin Expansion Remains a Key Pillar of the Story

Profitability trends across the company remain broadly positive. Adjusted segment profit rose 23% in Q4 (2% excluding Bombardier), reflecting operating leverage in the strongest businesses. For the full year, adjusted segment profit improved 11% (6% ex‑Bombardier). Looking ahead, Honeywell is guiding to 2026 segment margins of 22.7%–23.1%, representing 20–60 basis points of expansion. Management highlighted continued pricing discipline, productivity programs, and portfolio actions as levers that should offset rising R&D and Quantinuum investments, as well as inflationary pressure and mix headwinds in weaker segments.

Balanced Capital Allocation and Deleveraging Ahead of Separation

Honeywell used its strong cash flow to actively manage its balance sheet and return capital to shareholders while continuing to invest for growth. In the fourth quarter, the company returned $900 million via dividends and share repurchases and repaid $2.3 billion of debt, bringing full-year debt repayment to $3.8 billion. Over the year, Honeywell repurchased $3.8 billion of stock, or about 18 million shares, funded $2.2 billion in acquisitions, and deployed $1.0 billion in capital expenditures. For 2026, management signaled a tilt toward further debt reduction as it prepares for the aerospace spin, underscoring a commitment to maintaining financial flexibility through the separation process.

Constructive 2026 Outlook for Growth, EPS and Cash

Honeywell delivered a positive financial outlook for 2026, calling for total sales of $38.8–$39.8 billion, implying 3%–6% organic growth. Adjusted EPS is expected to land between $10.35 and $10.65, up 6%–9% from the prior year, supported by segment margin expansion to 22.7%–23.1%. Free cash flow is projected between $5.3 and $5.6 billion, implying about a 14% cash margin and strong conversion (around 83% at the high end, or roughly 90% when excluding noncash pension income). Pricing is expected to contribute roughly 3%–3.5% to growth, consistent with the roughly 4 points in Q4. For Q1, Honeywell guided to 3%–5% organic sales growth, segment margins of 22.4%–22.6%, and EPS growth of 2%–6%, with second‑half strength driven by backlog conversion and particularly solid aerospace and building automation demand.

Accelerated Investment and Progress in Quantinuum/Continuum

Honeywell highlighted material progress in its quantum computing venture, Quantinuum (also referred to as Continuum in the call). The business raised $840 million at a $10 billion pre‑money valuation, underscoring investor confidence in its technology and commercialization path. Quantinuum launched its Helios system—featuring nearly double the qubit count and high fidelity—and announced integration with NVIDIA’s ecosystem, positioning it as a more scalable platform for enterprise and research applications. Honeywell plans to increase Quantinuum-related spending by approximately $100 million year over year in 2026 to accelerate commercialization, acknowledging that this will be a near‑term drag of roughly 30 basis points on segment margins but arguing that the long‑term value potential justifies the investment.

Portfolio Simplification Moves Ahead with Major Spins and Divestitures

Management devoted significant time to outlining its portfolio simplification strategy. The Solstice Advanced Materials spin was completed in October 2025, marking a key milestone in the effort to sharpen Honeywell’s end‑market focus. The aerospace business is slated to be spun off in the third quarter of 2026, with leadership and board appointments already announced, underscoring the advanced state of planning. In addition, Honeywell intends to pursue the sale of its productivity solutions & services and warehouse & workflow solutions businesses in 2026. These moves are designed to streamline the company around clearer, higher‑growth end markets and to improve transparency for investors, even as they create near‑term stranded cost and execution challenges.

Energy & Sustainability Headwinds from Weak Catalyst Demand

Not all parts of the portfolio are performing strongly. In the Energy and Sustainability Solutions (ESS) segment, organic sales declined 7% in Q4, largely due to lower petrochemical catalyst shipments and project deferrals. Management cited slower-than-expected aftermarket orders and industry overcapacity as key issues pressuring volumes in this business. The result is an unfavorable mix for Honeywell, as high‑margin catalyst sales decline, creating a drag on segment margins and near‑term growth. While the company continues to see long‑term opportunity in energy transition solutions, the current cycle in petrochemical catalysts remains a notable soft spot.

Process Automation Facing a Slow Start to 2026

Process Automation & Technology (P&T) delivered roughly flat sales in Q4 and is expected to see a slow start to 2026. Parts of the business are suffering from lower volumes in measurement and controls products, and the outlook depends heavily on the timing of long‑cycle LNG and refining projects. Management expects these large projects to convert into revenue more meaningfully in the back half of 2026, but it acknowledged that final investment decisions and module conversion schedules introduce timing risk. This dependency on long‑cycle orders reinforces both the upside potential and the volatility around the growth trajectory in P&T.

Short-Cycle Industrial Automation Weakness, Especially in Europe and China

Industrial Automation showed signs of cyclical softness, with organic sales up just 1% in Q4. The company is now guiding this segment to be down low single digits to roughly flat in 2026. Management pointed specifically to weakness in Europe and China, as well as difficult comparisons versus prior‑year product strength. These short‑cycle dynamics limit near-term growth and pose an additional headwind to margin expansion in the segment. While Honeywell sees longer-term opportunities in automation and digitalization, the near-term environment remains choppy, especially in more economically sensitive regions.

Margin and Cost Headwinds from R&D, Mix and Quantinuum Investment

Despite overall margin improvement, Honeywell acknowledged several cost headwinds. Fourth-quarter results were partially offset by a step-up in R&D spending and cost inflation, compounded by an unfavorable mix due to lower catalyst volumes in ESS. Looking to 2026, the company expects an approximate 30 basis-point headwind from higher Quantinuum investment alone. Management also signaled continued repositioning expenses tied to portfolio restructuring and upcoming separations. While these factors weigh on near-term profitability, the company is positioning them as deliberate investments to support innovation and enable a more focused, higher-value portfolio.

One-Time Cash Charge and Higher Below-the-Line Items

Honeywell flagged several non-operational items that will impact near-term results. In the first quarter, the company will make a one-time $177 million cash payment tied to the settlement of litigation, which is excluded from its full-year free cash flow guidance. Q1 will also see higher interest expenses and repositioning costs, and management noted that tax timing created a $0.24 year-over-year EPS headwind in the fourth quarter. While these below-the-line items do not change the core earnings power of the business, they will affect quarterly optics and are important for investors modeling near-term cash and EPS trends.

Execution, Separation and Long-Cycle Timing Risks

Management was candid about the execution risks surrounding the upcoming aerospace spin and associated stranded costs. The aerospace separation is still targeted for the third quarter of 2026, and Honeywell expects to eliminate stranded costs within 12–18 months after the spin, though some will weigh on 2026 results. In addition, the company’s growing exposure to long‑cycle LNG and refining orders introduces timing risk: revenue and margin benefits rely on investment decisions and project conversion schedules that could slip. While the record backlog is a positive, investors were reminded that the pace of backlog conversion will be a key swing factor for 2026 performance.

Guidance and Outlook: Steady Growth, Margin Gains and Cash Strength

Honeywell’s guidance underscores management’s confidence in a steady, if not spectacular, climb in performance through 2026. The company expects 3%–6% organic sales growth, EPS up 6%–9%, and segment margins 20–60 basis points higher, with pricing contributing roughly 3%–3.5%. Free cash flow is projected at $5.3–$5.6 billion, supported by about $250 million in additional capex to build out capacity and support the record backlog. Q1 guidance anticipates modest growth—3%–5% organic sales, 2%–6% EPS growth—as elevated Quantinuum investment and higher below-the-line costs weigh on near-term results, with stronger momentum expected in the second half as backlog converts and aerospace and building automation continue to expand.

Honeywell’s earnings call painted a picture of a company in transition but on solid footing: strong demand and cash generation underpin a constructive 2026 outlook, while major portfolio actions aim to create a more focused and higher-value enterprise. Risks remain around specific weak spots—catalysts, short-cycle automation, and long-cycle project timing—as well as the execution of the aerospace spin and management of stranded costs. Yet, for investors willing to look through near-term noise, the combination of backlog strength, margin expansion, disciplined capital allocation, and strategic investments in areas like Quantinuum suggests Honeywell is positioning itself for durable value creation in the years ahead.