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Despite many Wall Street forecasts about its impending demise, the conglomerate model can still work — as long as you have the right ingredients and management.
Today, while most industrial conglomerates have reinvented themselves by breaking up into smaller pieces and refocusing on faster-growing industries, there has been one notable exception.
Honeywell On a Buying Spree
It's Honeywell International (HON) - founded in 1906 - which makes everything from cockpit controls to warehouse robots, fuel processing technology and myriad other products.
Its corporate strategy is a contrarian one - to get even bigger, as long as any deals fall within Honeywell’s three targeted mega-trends of automation, aerospace, and the energy transition.
Here are some of its most recent deals:
In July, it announced it is buying Air Products and Chemicals’ (APD) liquefied natural gas (LNG) processing technology business for $1.8 billion.
In June, Honeywell purchased CAES Systems Holdings — a manufacturer of radio frequency technologies and other electronics for the defense industry — for $1.9 billion. Also in June, the company closed on its $5 billion takeover of Carrier Global’s (CARR) security access business.
In March, Honeywell agreed to buy aerospace navigation technology specialist Civitanavi Systems SpA in Italy for $217 million.
These deals showed quite clearly what an incredibly complex company Honeywell is. I doubt if any other firm could buy businesses as different as aerospace electronics, contactless key solutions, and LNG heat exchangers in a matter of a few short months.
Honeywell CEO Vimal Kapur has only been in his position for about a year, and yet he’s already announced more large takeovers than his predecessor Darius Adamczyk did in his six years at the helm.
However, despite this recent flurry of acquisition activity, Wall Street remains unimpressed. Honeywell’s stock has lagged the broader market so far this year (down 3.9%), although it recently hit a 52-week high at $220.79.
Investors just don’t seem willing to pay as much for each dollar of Honeywell’s future earnings as they do for more focused industrial giants, such as electrical-equipment manufacturer Eaton Corporation (ETN).
Certainly, the stock’s performance reflects Honeywell’s disappointing recent stretch of earnings reports, which have shown little organic growth. But this problem is exactly what its recent deal activity is looking to fix.
Honeywell CEO Kapur has said he’s looking to divest businesses that represent about 10% of Honeywell’s revenue, as he seeks to focus the company on the megatrends of aerospace, automation, and the energy transition. Most of these will involve pruning one-off, non-core assets.
There may be one very major exception, though…
Quantinuum IPO
Honeywell is considering an initial public offering (IPO) of its majority-owned quantum computing firm, Quantinuum, as soon as next year. The firm has held discussions with several investment banks about a potential listing in the U.S., and could seek a valuation of about $10 billion for Quantinuum.
Honeywell shares jumped as much as 2.6% on July 26 following the news report on Bloomberg, its largest intraday move since early June.
Quantinuum was formed in 2021 by the merger of Cambridge Quantum and Honeywell Quantum Solutions. It has about 500 employees in the U.S., U.K., Germany and Japan.
In January, Honeywell closed a $300 million funding round for the quantum computing firm at a valuation of $5 billion. JPMorgan Chase led the fundraising, with participation from Mitsui and Amgen. The January round took Quantinuum’s total fundraising to about $625 million since its inception.
Cambridge Quantum is a pioneer in quantum software, operating systems, and cybersecurity, and was founded in 2014 as an independent company through the University of Cambridge's “Accelerate Cambridge” program. Meanwhile, Honeywell Quantum Solutions has built the highest-performing quantum hardware, based on trapped-ion technologies. The newly-formed company's H-Series trapped-ion quantum computers set the highest quantum volume to date of 1,048,576 in April 2024.
For those of you unfamiliar with quantum computing, it uses specialized technology — including computer hardware and algorithms that take advantage of the physics of quantum mechanics — to solve complex problems that classical computers or supercomputers can’t solve, or can’t solve quickly enough.
Quantum computers employ quantum bits, or qubits, that provide exponentially more computing power than computer code that uses ones and zeroes. In recent years, quantum computer makers have been gradually improving the technology to reduce the number errors and scale up the number of qubits.
Quantinuum is considered by some to be the largest and most advanced integrated quantum computing company in the world. It brought together the best-in-class quantum software available with the highest performing hardware available.
So, it's a real hidden gem inside of Honeywell.
Buy HON Stock
Even if we ignore Quantinuum, the stock of this misunderstood company is a buy.
Honeywell is poised to generate low double-digit earnings growth over the long term. The company will continue to benefit from its diverse product lines, as well as from its alignment with three key megatrends - supply chain automation, aerospace & defense, as well as energy and sustainability.
In addition, Honeywell has one of the strongest balance sheets out there, with a disciplined net debt/EBITDA level that typically runs around 1x. It also has a long history of returning capital to shareholders, as well as under-promising and overdelivering on its targets.
Of course, Honeywell is also making bets in mission-critical end markets that could yield very strong internal rates of return over the long term, such as the aforementioned quantum computing.
Buy HON below $207.
