Honeywell International Inc

I bought a starter position in Honeywell (“HON”), a well-recognized diversified industrial conglomerate that is aggressively simplifying its portfolio. Management recently announced the sale of their low-margin Warehouse & Workflow Solutions business, further narrowing the company’s focus. HONA is a crucial systems provider for virtually every commercial and defense airplane, with 14% of its revenue from commercial OEM operations. HONA’s aftermarket business captures an annuity-like revenue stream of high-margin service and spare parts for the lifecycle of an airframe. HONA is a primary beneficiary of increased military spending, with orders growing at a double-digit clip, driven by their dominant position on the F-35.

Honeywell International possesses a highly valuable aerospace business that could be worth as much as the company's total market cap. The aerospace aftermarket sector is characterized by stringent regulations and a limited number of players, leading to strong pricing power and margins. Elliott Investment Management's push for Honeywell to separate its aerospace and automation businesses is seen as a positive move that could unlock value. The manager believes that Honeywell shares are relatively low risk and represent a call option on improved performance post-spin, with several opportunities for growth identified.

We believe HON has a sustainable competitive advantage due to its scale, high customer switching costs, intangible assets, and long history of innovation. Many HON products are a low percentage of its customers’ total costs, and these products get designed into products and operations, which provide a long-term source of consistent revenue. HON recently announced plans to break the company into three separate entities by the end of 2026, which we believe will create shareholder value. Valuation appears attractive at 18x forward expected earnings, which is a less than market multiple.

We sold our position in Honeywell International (HON) following a deterioration in fundamental factors and following several quarters of disappointing operating results. Honeywell faces subdued demand from its industrial segment as customers continue to digest post-COVID spending, leading to a shortfall in our short-cycle product growth expectations. We believe it is prudent to move to the sidelines as these external forces will likely remain challenges for the foreseeable future.