Separation Will Refocus Operations and Unlock Pathways for Long-Term Upside

Key Takeaways

• Honeywell's separation into three entities can unlock value, positioning each for long-term growth with positive revenue and margin impact.
  
• Strategic acquisitions and growth in high-potential verticals like LNG and data centers are set to enhance revenue, margins, and operational stability.
  
• Economic uncertainties, geopolitical risks, and execution challenges from strategic changes may pressure Honeywell's revenues, profit margins, and growth expectations.

Catalysts

Engages in the aerospace technologies, industrial automation, building automation, and energy and sustainable solutions businesses in the United States, Europe, and internationally.

• Honeywell's decision to separate into three independent companies (Automation, Aerospace, and Advanced Materials) could unlock significant value and better position each entity for long-term growth, impacting revenue and margins positively.
  
• The acquisition of Sundyne and strategic bolt-on acquisitions are expected to enhance Honeywell's business profile, increasing both organic growth and segment margins by expanding their portfolio of solutions.
  
• Honeywell's ongoing commitment to a local-for-local strategy is likely to mitigate international trade tensions and tariff impacts, providing stability to revenue and protecting net margins through operational efficiencies.
  
• The company's focus on growing high-growth verticals such as LNG, data centers, and specialty chemicals, coupled with productivity improvements, should drive revenue growth and improve overall segment margins.
  
• Honeywell's continued share repurchase plans offer an opportunity for EPS growth, as repurchasing stock at what they consider attractive levels would reduce the number of shares outstanding, potentially boosting earnings per share.

Honeywell International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Honeywell International's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.3% today to 16.4% in 3 years time.
• Analysts expect earnings to reach $7.5 billion (and earnings per share of $12.23) by about September 2028, up from $5.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.0x on those 2028 earnings, up from 23.8x today. This future PE is greater than the current PE for the US Industrials industry at 7.0x.
• Analysts expect the number of shares outstanding to decline by 2.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Honeywell International Future Earnings Per Share Growth

Risks

• The increasingly uncertain economic climate, compounded by shifting global trade patterns and rising tariffs, could negatively impact Honeywell's future revenues and profit margins, raising caution about end-market demand.
  
• The planned separation into three standalone public companies carries execution risks, including potential stranded costs and one-time expenses, which could affect net margins and earnings.
  
• Industrial Automation's exposure to China and reported sales decline due to lower demand, especially in Europe and personal protective equipment, suggests vulnerability to geopolitical instability, impacting revenue and growth prospects.
  
• The pressure from acquisition integration costs and mix adjustments in Aerospace Technologies indicates potential margin contraction, which could limit expected earnings growth.
  
• A prudent guidance posture due to geopolitical uncertainties and potential demand weakness implies Honeywell's financial expectations might not be fully met if global economic conditions worsen, impacting revenue and profit targets.

Valuation

• The analysts have a consensus price target of $252.97 for Honeywell International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $290.0, and the most bearish reporting a price target of just $210.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $45.8 billion, earnings will come to $7.5 billion, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of $214.2, the analyst price target of $252.97 is 15.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.