Honeywell’s First-Quarter Results Unsurprisingly Solid

Business Strategy & Outlook

Honeywell is one of the strongest multi-industry firms in operation today. The firm has successfully pivoted to capture multiple ESG trends, including the need to drive energy efficiency, reduce emissions, and e-commerce, among others. The predicate of the thesis is mostly on a) increased demand for warehouse automation solutions; b) new digital offerings that promote data analytics in power plants, as well as remote security management, and energy savings in building solutions; c) an increasingly automated world in mission critical end-markets like life sciences. Over the next five years, Honeywell is capable of mid-single-digit-plus top-line growth, incremental operating margins in the low-30s, low-double-digit adjusted earnings per share growth, and free cash flow margins in the midteens.

The Honeywell is capable of meeting that assumed targets through a combination of portfolio refreshes, powerful new product introductions, breakthrough initiatives, and strategic partnerships in areas where the firm has domain expertise, a focus on high growth regions that’ll help the firm grow faster than its core markets, continuous improvement initiatives cantered on fixed cost reduction, on-time delivery and simplified design, supply chain automation, and an increasing shift toward software with a recurring revenue stream. The Honeywell was wise to continue investing aggressively during the height of the pandemic, which will reward the firm with share gains.

Despite appreciable headwinds in about 40% of Honeywell’s portfolio from the pandemic, in some ways, the COVID-19 has only accelerated the need for automation, particularly in warehousing given the strong secular trend toward e-commerce. Many of Honeywell’s automation solutions offer customers meaningful ROI payback in a truncated period of time. Furthermore, the Honeywell is strongly positioned to lead in carbon capture given its large installed base and investments in solvents.

Finally, Honeywell’s early-stage investments like quantum computing represent a leapfrog in technology, and they have multiple use cases in fast growing industries like cybersecurity.

Financial Strengths

Honeywell operates from a very strong financial position and believes its credit risk is very low. Honeywell boasts one of the lowest net debt/EBITDA ratios of any of the U.S. multi-industry firms that cover at 1.1 times at the end of 2021, though with the exception of 2020, that figure has been at or below 1 time since 2012. In fact, credit its balance sheet strength as one of its greatest assets during the pandemic as it was allowed to maintain its growth capital expenditures plans while other competitors froze growth capital expenditures spending in 2020. Furthermore, Honeywell’s interest coverage ratio (EBIT/interest expense) stands at over 18 times as of the end of 2021, meaning Honeywell has ample firepower to service its interest payments. Finally, Honeywell’s pension and other postretirement benefits have a minimal effect on fair value, as its pension is overfunded, and its other retiree benefits deduct a mere 21 cents per share on the fair value (which likely overstates the impact given the rising interest rate environment in 2021).

Bulls Say

Honeywell is making several organic bets in mission critical end markets that should yield triple-digit IRRs over the long term, including in quantum computing and building automation.

Honeywell boasts one of the strongest balance sheets in the multi-industry universe, and the company has a history of under promising and over delivering on its targets.

With approximately 60% of its portfolio in short-cycle businesses and with the remaining portfolio in end markets like aerospace and oil and gas, Honeywell is poised to outperform in 2021 with a value-cyclical reopening trade.

Company Description

Honeywell traces its roots to 1885 with Albert Butz’s firm, Butz-Thermo Electric Regulator, which produced a predecessor to the modern thermostat. Today, Honeywell is a global multi-industry behemoth with one of the largest installed bases of equipment. The firm operates through four business segments, including aerospace, building technologies, performance materials and technologies, and safety and productivity solutions. In recent years, the firm has made several portfolio changes, including the addition of Intelligrated in 2016, as well as the spins of Garrett Technologies and Resideo in 2018. In 2019, the firm launched Honeywell Forge, its enterprise performance management software solution that leverages the firm’s domain expertise in buildings, airlines, and critical infrastructure.

(Source: Morningstar)

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