2023-12-18 04:11:36 ET
Summary
- Honeywell has positioned itself as a conglomerate towards growing industries and has divested less promising businesses through spin-offs.
- The company's activities are focused on automation, climate change, digitization, and aerospace, providing a solid foundation for organic growth.
- Honeywell recently announced a $4.95 billion deal to acquire Carrier's Global Access Solutions business, adding to its Building Technologies segment.
In the early summer, I thought that Honeywell ( HON ) was doing well and appeal was improving. The company has rightfully deserved its license to operate as a conglomerate, having positioned the business towards growing industries, while it has engaged in a string of spin-offs to "divest" less promising businesses as well.
Despite being a savvy allocator of capital, a 22 times prevailing earnings multiple felt a bit rich in a higher interest rate environment this summer. Ever since, the company has more or less delivered on its promises which called of modest growth this year, as a larger deal for part of Carrier Global's (CARR) activities near the end of the year has fortified the prospects for growth next year further.
With shares still trading around the $200 mark again at a low 20 times multiple, long term appeal is seen, but I am in no need to get involved at these levels yet.
About Honeywell
Honeywell is a diversified industrial empire, which reports activities across four divisions. The largest of these segments is the aerospace industry, complemented by a performance material and technology business, a safety and productivity solutions business and a building technology business.
In general, many of these activities are geared towards growth industries, as the company has divested quite some activities, mostly in the form of spin-offs (which subsequently have seen a very mixed performance). Examples of these include Garrett Motion ( GTX ) , AdvanSix ( ASIX ) and Resideo Technologies ( REZI ).
With the core business focused on automation, future of aviation and the energy transition, it is these secular tailwinds which provide a solid foundation for GDP+ organic growth.
The company generated over $34 billion in sales in 2021 on which it reported adjusted earnings of $8 per share (and change). The company guided for 2022 sales to advance towards $36 billion, with earnings seen around $8.50 per share. In the end, the company posted sales of $35.5 billion (falling short of the original guidance) while earnings of $8.76 per share came in stronger than thought. This was a rare combination during the inflationary trends observed in 2022 (a year in which many companies posted higher sales, but saw margin pressure).
For 2023, the company guided for sales to come in between $36 and $37 billion, with earnings seen at a midpoint of $9.00 per share (plus or minus twenty cents). Net debt of $9.4 billion was pretty manageable, as the company hiked the guidance (on both the sales and earnings front) following strong first quarter results and a bolt-on deal announced, although that net debt rose to $12 billion.
With shares trading at $202 in June, the resulting 22 times earnings multiple was high, but backed up by a resilient performance, at a time when many conglomerates (thinking of GE ( GE ) and 3M ( MMM ) ) were struggling. Compared to these names, Honeywell was trading at a premium, although the same observation no longer applies if we compare the shares to specialized and higher-growth names like Emerson, Parker Hannifin and Rockwell Automation.
After all, with a great focus on energy transition, automation, digitization and aerospace, Honeywell's growth profile remains good, yet I only saw strong appeal at an entry multiple in line with the market, at about $180 per share.
Unchanged
Forwarding from June, shares trade at exactly the same price, that is $202 per share, although shares dipped to the $175s in the fall of this year.
Over the summer, the company posted resilient second quarter earnings results, and in August the company did announce a twenty cent increase in the annual dividend, now running at $4.32 per share (payable on a quarterly basis).
In October, third quarter results were resilient as well, triggering another modest hike in the full year guidance, with sales seen between $36.8 and $37.1 billion, and adjusted earnings now seen between $9.10 and $9.20 per share. With 667 million shares trading near $200, Honeywell commands a near $135 billion equity valuation, a number which jumps to over $147 billion if we factor in net debt of $12.4 billion, as the overall conclusions were largely similar as was the case in June.
An Interesting Deal
Early in December, Honeywell announced a $4.95 billion deal to acquire Carrier's Global Access Solutions business. With the cash deal, Honeywell will acquire the hardware and software solutions of this segment to add to its Building Technologies segment. These activities are best known from the electronic locks, typically used in hospitality and hotel settings.
The company reports that it pays a 13 times EBITDA multiple for the activities, including a non-specified synergy number. Carrier itself reported that a 17 times EBITDA multiple has been received, suggesting that Honeywell sees $90 million in annual synergies on a non-specified revenue number.
The impact of all of this is hard to measure, given that financial details on the deal are lacking. That being said, in comparison to a $147 billion enterprise valuation, the deal tag comes in at just over 3% of its own valuation, which suggests a nice contribution in terms of sales and (likely) pre-tax profits as well, but it is certainly no game changer.
Reiterating My Stance
Amidst all of this, I am mostly reiterating my stance from June. Pro forma the deal with Carrier net debt will jump to $17 billion and change, which is a substantial jump, but leverage ratios are likely to remain just below 2 times, and hence do not post a massive issue.
Consequently, shares still trade around 22 times earnings, and while the outlook for further growth in 2024 is secured on the back of this deal and organic growth, I am cautious given the rather demanding multiple, even as interest rates have come down a bit in recent times.
For further details see:
Honeywell: Carrying On With Part Of Carrier