Honeywell: Segment Realignment Makes Sense but Doesn’t Alter Our Long-Term Views

Wide-moat-rated Honeywell HON announced it’s realigning its business segments, beginning in the first quarter of 2024. We see no reason to change our $228 fair value estimate, particularly since we’re skeptical the changes will translate to meaningful growth synergies. We think the realignment changes make sense, though the technology-focused name changes strike us mostly as a marketing effort. After all, Honeywell is still predominantly an industrial company (technology solutions are less than 10% of sales, and most of these are embedded in hardware). Even so, its technology is a key part of the firm’s strategy and should help its long-term sales growth algorithm.

On the plus side, we think the realignment should help Honeywell focus on its most important trends in aerospace, automation, and the energy transition. These are propelled by middle-income class growth, greater energy usage, lack of skilled labor, reshoring, decarbonization, and electrification. These are also trends we’ve highlighted even before they became a recurring part of management’s latest talking points. Judging by the stock price relative to our fair value, investors may also not fully appreciate the potential windfall from these trends.

One comment that stood out to us from CEO Vimal Kapur is that the new structure, “clarifies which part of [Honeywell’s] businesses are core and which are not helping inform [their] inorganic growth strategy.” When we first read through the press release, we came to the same conclusion.