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In the final days of 2023, I believed that Honeywell International Inc. (NASDAQ:HON) was carrying on after acquiring part of Carrier (CARR). Honeywell has well-positioned itself to be a conglomerate which is focused on growing industries, while it has sold and spun-off a range of underperforming and less promising businesses recently.
With the company upping the pace of acquisitions, Honeywell continues to work on growth, and it’s positioning, although that net debt increases rapidly here. I like these moves, making shares look interesting as the company keeps growing in valuation here.
Honeywell – A Diversified & Solid Conglomerate
Honeywell is a broad-based industrial conglomerate, of which the aerospace industry is the largest segment. This complemented by performance materials & technology, safety & productivity solutions, and a building technology segment.
The company has made many acquisitions to grow and rightfully position these assets, having sold off a broad range of underperforming assets, many of which are now standalone public companies such as Garrett Motion (GTX), Resideo Technologies (REZI) and AdvanSix (ASIX).
Focusing on automation, the future of aviation and the energy transition, the company has positioned itself as a broad-based GDP+ growth business. This successful management of the conglomerate stands in sharp contrast to the performance of some other conglomerates, names like General Electric (GE) and 3M Company (MMM) come to mind.
Late in 2023, the company was on track to generate full-year sales around $37 billion, with adjusted earnings seen just over $9 per share. Trading at $200, Honeywell commanded a $135 billion equity valuation based on a share count of 667 million shares, for a $147 billion enterprise valuation once net debt was considered.
This all was going to change a bit as Honeywell announced a $4.95 billion deal to acquire the Global Access Solutions business from Carrier. This added hardware and software solutions to its Building Technologies, such as electronic locks, which are used in hospitality and hotels.
Given the size of Honeywell, this was more or less a bolt-on deal, although the net debt would jump towards $17 billion, for a less than 2 times leverage ratio. Trading at around 22 times earnings around the $200 mark, I was waiting for an opportunity to buy into the shares at a market multiple in the high-teens.
Trading Flattish
Since the end of last year, shares of Honeywell have largely traded in a $190-$220 range, now trading at $214 per share. Earlier this year, Honeywell posted a 3% increase in 2023 sales to $36.7 billion, while growing adjusted earnings by forty cents to $9.16 per share.
The company laid out a solid organic outlook, calling for sales to rise by a midpoint of 5% to $38.5 billion, with adjusted earnings seen between $9.80 and $10.10 per share, that is excluding the impact of the Carrier deal.
In March, Honeywell announced an EUR 200 million deal to acquire Civitani Systems, to ignite some more momentum to the aerospace activities of the firm.
After a resilient first quarter earnings report, the company closed on the deal with Carrier in June, adding over a billion in sales to the security portfolio of Honeywell. With the deal having closed in the middle of the year, the company updated the midpoint of the full year sales guidance to $38.9 billion, with adjusted earnings now seen between $10.15 and $10.45 per share.
Operating with $13 billion in net debt as of the end of the first quarter, HON pro forma net debt would jump to $18 billion following notably the deal with Carrier, in fact, it is going to jump towards $20 billion here.
Another Deal
In June 2024, Honeywell announced a $1.9 billion deal to acquire CAES Systems Holdings. This deal, valued at 14 times EBITDA multiple, adds defense technology solutions, including new electromagnetic defense solutions for end-to-end RF signal management. Formerly known as Cobham Advanced Electronic Solutions, the deal will add over 2,000 workers to the payroll.
With few other financial details announced, this is truly a bolt-on deal, with the purchase price equal to about 1% of the value of Honeywell here.
With this deal boosting pro forma net debt to $20 billion, that is not the end, as Honeywell announced another deal in July. The company reached a $1.8 billion deal to buy the LNG unit from Air Products (APD). Valued at 13 times adjusted EBITDA, the deal is driven by the anticipation of higher natural gas demand, with few other financial details being shared.
What Now?
Trading at $214 per share, Honeywell stock multiples have come down to 20–21 times amidst the improved earnings outlook for this year, although the truth to be said is that there is quite some leverage has been added here. All this makes me still constructive on Honeywell International Inc. shares, but I simply regard them as fair, towards fully valued, as I am hoping for a dip below the $200 mark to gradually buy into the shares.
For now, Honeywell remains actually quite active to grow and improve the portfolio, which makes me quite upbeat on Honeywell’s business, as I look for a nicer entry point to get involved.
