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Honeywell Shares Tumble on Airline Weakness

Shares of Honeywell International Ltd. (HON) Friday tumbled almost 17 percent, weighing down other blue-chip stocks, as investors digested another round of bleak news about its airplane parts and specialty materials businesses.

Analysts did not voice a great deal of surprise that Honeywell cut its profit forecasts on Thursday for the second time in as many months.

"The signs that expectations were out of skew with reality were widespread," said Prudential Securities analyst Nicholas Heymann who has a "hold" rating on Honeywell's stock.

"We believe the company's biggest risk currently lies in the potential for an extended shutdown in Boeing's commercial aircraft operations, possibly for several months," Heymann wrote in a research note. "A complete cessation of large commercial aircraft manufacturing has never occurred in the history of the business, but presently remains a real possibility, we believe."

Honeywell's stock, a component of the Dow Jones industrial average , closed down $4.78, or 16.9 percent, to $23.56 on the New York Stock Exchange. The stock is off about 30 percent this year, underperforming the nearly 17 percent decline on the Dow index.

Honeywell said Thursday that the broad economic recovery was not materializing, especially in the aviation industry where the company supplies brakes, wheels and electronics. The aftermath of last year's attacks on the United States continues to roil the entire industry as airlines park jets.

Heymann cut his 2002 earnings targets for Honeywell to $2.00 per share from $2.28 a share. He also lowered his 2003 targets for Morris Township, New Jersey-based Honeywell.

J.P. Morgan responded by downgrading Honeywell's stock to "market perform" from "buy." Donald MacDougall, an analyst at J.P. Morgan, said Honeywell's profit warning, which follows a lowered forecast in July, somewhat damages the company's credibility.

Honeywell bonds also fell because investors perceive more credit risk. Its 6.125 percent notes maturing in 2011 now yield about 5.23 percent, or 1.28 percentage points more than 10-year U.S. Treasuries, traders said.

"While a lot of other firms are benefiting from the increase in defense spending, (Honeywell) is bogged down by reduced demand for its airline products, weak industrial product demand, and liabilities for asbestos," according to a research report by independent credit analyst firm Egan-Jones Ratings Co.

Honeywell faces thousands of asbestos cases related to its Bendix brake pads, but it also has a $2 billion insurance reserve to pay future claims. It has settled about 53,000 Bendix claims at an average cost of about $1,000 apiece.

On Friday, Honeywell settled asbestos claims with five mechanics in Illinois, but company spokesman Michael Holland said the resolution was "immaterial" to the company. Terms were not disclosed.