Honeywell Aims to Mirror GE's Path, but In investors' Eyes, Results Fall Short.
In recent news, industrial conglomerate Honeywell International (HON) unveiled a plan to split into three standalone entities. However, this move hasn't stirred much enthusiasm among investors. As a matter of fact, Honeywell's stock has suffered this year, despite the industrial sector's impressive rally. Looking back at the past five years, Honeywell's growth pales in comparison to its sector's, with the company only managing a 17% gain compared to the sector's 65%.
So, why is Honeywell calling it quits on its behemoth structure, and what can be expected from these new entities? Let's delve into it.
The decline of Honeywell
Honeywell's stagnation can be traced back to a time when one of its closest competitors, General Electric (GE), went through a similar crisis. GE, at its peak, was a titan with a market cap that reached over $450 billion in 1999. However, the company began focusing heavily on quarterly profits at the expense of long-term vision, leading to its conglomerate structure becoming more of a burden than a boon. The result? GE's removal from the Dow Jones Industrial Average (DJI) in 2018 due to its struggling stock performance.
Emulating GE's breakdown, GE split into three public companies – Aerospace, Vernova, and HealthCare Technologies – in 2023 and 2024. This strategic move aimed to unlock value by offering each business unit a crystal-clear investment thesis and an easier path to growth, free from the bureaucratic hurdles found in larger conglomerates. This strategy paid off, with GE Vernova, the renewable energy arm, ranking among the best-performing stocks in the S&P 500 in 2024.
Now, Honeywell's investors are hoping for a similar turnaround.
Honeywell's makeover
Honeywell plans to reorganize its four primary divisions – Aerospace Technologies, Industrial Automation, Building Automation, and Energy and Sustainability Solutions – into three entities.
- Advanced Materials: This segment will focus on special chemicals and materials, accounting for approximately $4 billion in revenue during 2024.
- Honeywell Aerospace: With a $15 billion revenue in 2024, Honeywell Aerospace will build upon its existing expertise in auxiliary power units, engines, and avionics, offering its services to various commercial, defense, and space platforms. Opportunities lie in upgrading legacy fleets, adopting autonomous technology, electrification, and pursuing emissions reductions.
- Honeywell Automation: With around $18 billion in revenue, this entity will continue its multidecade legacy in the industrial, energy, process, and building end markets. Its services, software, and technology aim to boost efficiency across buildings, warehouses, manufacturing, and bridge the gap between automation and autonomy.
CEO Vimal Kapur highlights the potential for significant growth in an automated facility, where technology, equipped with historical data, can make adaptive decisions and recommendations based on changing conditions or unplanned issues.
A long, bumpy road ahead?
Despite Honeywell's strategic moves, analysts remain skeptical about the potential for immediate gains. The company's operating margins fall below those of its peers, and Honeywell Automation's organic sales growth is on a downward trend. Therefore, Honeywell's stock might not experience a significant boost in shareholder value right away.
Is Honeywell a worthwhile investment?
The good news? Honeywell offers a tempting dividend yield of 2.2%, which surpasses the S&P 500 average of 1.2%. With the stock's current trading price around $210 and a midpoint projected EPS of $10.30 for 2025, Honeywell's forward adjusted P/E ratio hovers at approximately 20. This represents a solid valuation if the company recovers from its current slump. However, if Honeywell remains a low-growth company, this valuation might be an attractive offer at best. Compared to rivals like Lockheed Martin, offering a higher yield and lower valuation, Honeywell might look like a less compelling option for some investors.
Racing towards the future
With the uncertainties surrounding Honeywell's future performance, investors must carefully weigh their options. Some may believe in the company's ability to unlock hidden potential through a breakup and might consider investing in anticipation of gains down the road. Others might adopt a more cautious approach and wait for clearer signs of economic recovery and strategic achievements before diving in.
For those constantly keeping an eye on specific aspects of the company, the breakup could present an opportunity to invest in the most attractive entity post-split, similar to the success that followed GE's separation. Ultimately, whether Honeywell proves to be a bargain or a missed opportunity remains to be seen.
Investors are hoping that Honeywell's split into three entities will result in a turnaround similar to General Electric's, as GE Vernova, its renewable energy arm, became one of the best-performing stocks in the S&P 500 after their separation.
Honeywell's new entities include Honeywell Aerospace, which will focus on auxiliary power units, engines, and avionics, and Honeywell Automation, which aims to boost efficiency across various industries through software and technology.
Despite analysts' skepticism about Honeywell's potential for immediate gains, the company offers a tempting dividend yield of 2.2%, surpassing the S&P 500 average.
As Honeywell underperformed its sector in the past five years, some investors might view the company's stock as a potential bargain if it recovers from its current slump, while others might adopt a more cautious approach and wait for clearer signs of economic recovery and strategic achievements before investing.