Diversified manufacturer Honeywell recently announced that it will spin off its Advanced Materials business as a separate firm. That unit make a variety of products, ranging from body armour and pharmaceutical packaging to air-conditioning refrigerants and packaging films.
Activist investor Elliott Investment Management, which owns $5 billion of Honeywell’s shares, instead wants the company to split another way, with one of the new businesses focused on automation, energy and sustainability solutions; the other would be focused on aerospace. The activist believes separation along these lines would produce share-price gains of 51% to 75% over the next two years.
Honeywell has not yet responded to Elliott’s demand. Regardless of which path the company chooses, the likelihood of more spinoffs should help unlock its hidden value and so benefit investors.
HONEYWELL INTERNATIONAL INC. $227 is a buy.The company(Nasdaq symbol HON; Manufacturing & Industry sector; Shares outstanding: 650.2 million; Market cap: $147.6 billion; Dividend yield: 2.0%; Takeover Target Rating:Medium; www.honeywell.com) is a diversified technology firm operating in four segments: Aerospace Technologies (41% of sales); Industrial Automation (26%); Building Automation (16%); and Energy and Sustainability Solutions (17%).
Honeywell has long history of using acquisitions to enhance its expertise in certain areas.
For example, in June 2024, it paid $4.92 billion for Carrier Global Corp.’s (see page 93) Global Access Solutions business. That business makes electronic locks for big companies, hotels and hospital chains.
In August 2024, the company also purchased CAES Systems Holdings for $1.97 billion. CAES makes antenna systems and communication networks for aerospace and defence companies. The purchase will bolster Honeywell’s position in key defence programs like the F-35 fighter jet program.
Those new businesses helped lift Honeywell’s revenue in the three months ended September 30, 2024, by 5.6%, to $9.73 billion from $9.21 billion a year earlier. If you factor out the contribution of acquisitions, revenue rose 3% on strong demand from customers in the defence and space industries. Excluding one-time items, earnings rose 8.4%, to $2.58 a share from $2.38.
The company ended the quarter with cash of $10.92 billion, while its long-term debt of $25.93 billion is a moderate 18% of its market cap.
In October 2024, Honeywell announced that it would spin off its Advanced Materials business, which is part of the company’s Energy and Sustainability Solutions segment. It plans to do so on a tax-free basis for shareholders by early 2026.
The Advanced Materials business could, as a separate company, be valued at over $10 billion. This year along, it should generate revenue of $3.8 billion, or about 10% of Honeywell’s overall revenue.
Meantime, Honeywell’s new businesses will probably lift its earnings in 2024 by about 11% to $10.20 a share, and the stock trades at a reasonable 22.3 times that forecast. The company also just raised the quarterly dividend by 4.6%. The new annual rate of $4.52 a share yields 2.0%.
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