Honeywell: On a Takeover Spree (NASDAQ:HON)

In the last days of 2023, I believed that (Honeywell International Inc.)NASDAQ:HON) continued its operations after taking over part of the Carrier (CARR). Honeywell is well positioned as a conglomerate that focuses on growth industries, while recently it has sold and spun off a number of unprofitable and less promising businesses.

As the pace of acquisitions picks up at the company, Honeywell continues to work on growth and positioning, although net debt is rising sharply here. I like this move, making the stock look interesting as the company continues to grow in valuation here.

Honeywell – A Diversified and Solid Conglomerate

Honeywell is a broad-based industrial conglomerate, with its largest segment being aerospace and construction. It is complemented by materials and performance technologies, safety and productivity solutions, and building technologies.

The company has made numerous acquisitions to expand and to appropriately allocate these assets by selling a wide range of underperforming assets, many of which are now standalone public companies such as Garrett’s Move (GTX), Resideo Technologies (REZI) AND AdvanSix (ASIX).

With a focus on automation, the future of aviation and the energy transition, the company is positioning 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, such as General Electric (GE) AND 3M Company (MMM) come to mind.

At the end of 2023, the company was on track to generate full-year sales of about $37 billion and adjusted earnings of just over $9 per share. Honeywell, trading at $200, had an equity valuation of $135 billion on 667 million shares outstanding, giving it an enterprise valuation of $147 billion after net debt.

All that was about to change a bit when Honeywell announced a $4.95 billion deal to acquire Carrier’s Global Access Solutions business, adding hardware and software solutions to Building Technologies, such as electronic locks that are used in the hotel and hospitality industries.

Given Honeywell’s size, it was more or less a bond-on deal, although net debt would have increased to $17 billion, for a leverage ratio of less than 2x. Trading at about 22x earnings in the $200s, I was waiting for an opportunity to buy the stock at a market multiple in the high teens.

Flat trade

Honeywell shares have largely traded in a range of $190-$220 since the end of last year, currently trading at $214 per share. Earlier this year, Honeywell reported a 3% increase in 2023 sales to $36.7 billion, while increasing adjusted earnings by forty cents to $9.16 per share.

The company provided a solid organic outlook, predicting sales would increase 5% to $38.5 billion, with adjusted earnings of $9.80 to $10.10 per share, excluding the impact of the Carrier transaction.

In March, Honeywell announced a €200 million deal to acquire Civitani Systems, a move that will further expand the company’s aerospace business.

After a resilient first-quarter earnings report, the company closed on a deal with Carrier in June, adding more than $1 billion in sales to Honeywell’s security portfolio. Because the deal closed midyear, the company updated its full-year sales guidance to $38.9 billion, and adjusted earnings are now between $10.15 and $10.45 per share.

With net debt at $13 billion at the end of the first quarter, HON’s pro forma net debt is expected to increase to $18 billion as a result of the Carrier deal; in reality, it is expected to increase to almost $20 billion here.

Another offer

In June 2024, Honeywell announced a $1.9 billion deal to acquire CAES Systems Holdings. The deal, valued at 14x EBITDA, adds defense technology solutions, including new electromagnetic defense solutions for comprehensive RF signal management. Formerly known as Cobham Advanced Electronic Solutions, the deal will add more than 2,000 employees to its payroll.

Given the few financial details, it is essentially a side deal priced at about 1% of Honeywell’s value.

This deal increases pro forma net debt to $20 billion, but that’s not all, as Honeywell announced another deal in July. The company reached a $1.8 billion deal to buy an LNG unit from Aerospace Products (APD)The deal is valued at 13 times adjusted EBITDA. The transaction is being driven by expectations of higher demand for natural gas, with few other financial details disclosed.

What now?

At $214 a share, Honeywell stock multiples have fallen to 20-21 times on the back of improving earnings prospects this year, although it’s true that some leverage has been added. All of this leaves me still constructive on Honeywell International Inc. stock, but I just think it’s fair value, towards full value, as I’m counting on a dip below $200 to gradually buy the stock.

For now, Honeywell continues to actively pursue and enhance its portfolio, which makes me optimistic about Honeywell’s business as I look for a better place to get involved.