Stock Analysis: Honeywell (HON)

Before the opening bell yesterday morning, Honeywell announced the results of its portfolio analysis, an analysis that was spurred by activist investor pressure.  Third Point's Dan Loeb challenged Honeywell, shortly after new CEO Darius Adamczyk took the helm, that the company isn't doing enough to capture shareholder value and that they should spin off the Aerospace division. 

After the company has done deep analysis of their portfolio of products, they agreed to do not 1, but 2 spinoffs from the company.  Neither spinoff, however, is the one that Third Point asked for.  Instead, the company is going to spin off their homes business - essentially the HVAC and fire protection products which they have (thermostats, filters, other equipment for home and businesses) as one business.  This business will be worth approximately $4.5B.  The second spinoff will be their transportation business, which is primarily rooted in their low-margin, but highly successful turbo chargers, which will be worth around $3B.  Both of these spinoffs are expected to be best in class in their respective areas as well as have the freedom and flexibility to make the investments they need to stay at the top.  At the same time, this puts more high-growth focus inside the Honeywell that remains with plenty of capital to go out and make strategic acquisitions as well.  Honeywell will be left with businesses in "six attractive industrial end markets."  The spinoffs are expected to complete by the end of 2018.

For those interested or worried, these spinoffs will be tax-free and will not require a shareholder vote.  In other words, this will play out very much like the Advansix spinoff a year ago, which was a very successful spinoff in itself.

I feel this was an incredibly great move.  The company did a great job looking through its portfolio and assessing where its value and direction are.  It's now positioning itself to increase its organic growth and enable it to free up cash to put to work with acquisitions as well.  This typically plays right into what analysts and institutions wants to see and has them ready for what could be the early stages of high growth.  If that wasn't good enough, the company also issued estimated quarterly results.  Those results look strong, with earnings estimated at about $1.75, sales at about $10.1B and organic growth registering at a fabulous 5%!  All numbers beat expectations going in.  To put the final bow on the announcement, they also lowered the lower end of their FY18 earnings guidance by five cents, now putting the range in the $7.05 - $7.10 range.  

Despite all of this fabulous news, the stock has slumped the last couple days.  I suspect that there were a number of traders in the name, playing the whole pressure from Third Point and respective portfolio review.  The stock has climbed nicely since those announcements and they're likely selling on the news.  However, I see this being big news in the long-run.  I expect the spinoffs to be very successful in themselves, as they could either be buyout opportunities themselves, or in the market to buy other companies or business divisions to help their own growth.  I'll be doing deeper assessments as we go into the earnings call and beyond, but I expect there's value being unlocked with this move.  For now, we wait for that earnings call where we may get even more details.  Currently that call is expected to be around October 20.

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.

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