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Shubham Jaipuria
Shubham Jaipuria
Articles (45) 

Why Honeywell Is Winning

The company appears to be a great long-term play given the benefits it expects from reorganization activities

September 13, 2018 | About:

Honeywell International Inc. (NYSE:HON) has been winning big this year. The industrial conglomerate has been posting strong operating results and various micro and macro factors support the bull case for the stock.

A focused approach

The company's reorganization efforts are expected to add significant value. Since last October, Honeywell has returned 12% to shareholders as the spinoff announcement of its Garrett and Resideo divisions was well received by the market.

Most importantly, analysts project Honeywell will benefit from the move as the company will be able to adopt a more focused approach, with businesses that have a slight disconnect to its core operations running as separate entities.

The reorganization lets Honeywell place a greater focus on its six remaining divisions, which it can leverage to grow further. While increased defense spending and geopolitical risks are serving the company’s aviation division well, the increased adaptability of e-commerce is helping to grow its warehouse automation business.

More specifically, Honeywell’s acquisition of Intelligrated last year is bolstering CEO Darius Adamczyk’s optimism about the warehouse automation industry’s future value. Moreover, it's helping the company serve the needs of big-ticket clients such as Amazon (NASDAQ:AMZN).

"It's been just a terrific growth business. I mean, when you think about 50-, 100-percent booking rate increases, top-line growth of 20 percent plus, I think it's very, very exciting,” Adamczyk said in a CNBC interview last week.

Garrett and Resideo

The company's spinoff proceedings are in the final stages. Honeywell announced on Wednesday that a chief financial officer and full board of directors has been selected for Resideo Technologies Inc., a new entity handling Homes and ADI Global Distribution.

"It is an incredible opportunity to launch a company poised to lead the Internet of Things for the Homes market while benefiting from the rich heritage of such a well-known brand as Honeywell," Mike Nefkens, president and CEO of Honeywell Homes, which will become Resideo following the reorganization, said in a press release.

Moreover, Honeywell announced that for every 10 shares of Honeywell owned, investors will receive one share of Garrett Motion Inc., a new entity that consists of the transportation systems and automotive divisions. The stock will begin trading on the New York Stock Exchange on Oct. 1 under the ticker symbol “GTX.”

Garrett has been performing tremendously well. Its promising product portfolio has generated a 7% organic increase in revenues to $3.1 billion in the first half of the year. In addition, the company said in a recent filing that "market penetration of vehicles with a turbocharger is expected to increase from approximately 47% in 2017 to approximately 59% by 2022," which should allow the business to grow at a faster rate than overall automobile production. 

To conclude

From a fundamental perspective, Honeywell announced it increased its full-year earnings guidance by 5 cents to a range of $8.10 to $8.20, owing to the renewed confidence in its core divisions and growth in backlog, coupled with a one-time accounting impact due to its Bendix asbestos liabilities.

In regard to valuation, the company is relatively fairly valued based on its forward price-earnings ratio of 18.69, which is above the industry median of 17.67. Morgan Stanley sees the company going up to $175, an approximately 7% increase from current levels.

Overall, Honeywell appears to be great long-term play currently. Adding to the optimism, the company has an operating margin of 16.2% as compared to the industry median of 7.08%. Although it's a mature company not capable of generating astronomical returns, it's still producing exceptional operational results and strong stock performance.

Disclosure: I do not own any of the stocks mentioned.

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