Honeywell's Breakup: A Windfall for Investors?

Honeywell International (HON) has announced a significant restructuring, breaking up into three separate entities: Aerospace, Automation, and Advanced Materials. This move, largely driven by activist investor Elliott Management, is expected to unlock value for shareholders. But what does this breakup mean for investors, and should they consider Honeywell a buy right now?

The Rationale Behind the Breakup

Elliott Management, which took a $5 billion stake in Honeywell in November 2024, has been pushing for a breakup, arguing that the sum of the parts is greater than the whole. The activist investor believes that Honeywell's businesses would be better run as separate companies and that the market would grant them higher valuation multiples. Honeywell's CEO, Vimal Kapur, echoed this sentiment, stating that the breakup is driven by the conviction that there's more growth momentum and value to create as separate companies.



Is Honeywell Undervalued?

Comparing Honeywell with its representative comparable companies, it appears that Honeywell is undervalued. However, the extent of the undervaluation is not as significant as some investors might expect. There are reasons why Honeywell trades at a discount to many of its peers, and it's not just because of the conglomerate structure.

For instance, Honeywell Aerospace's 26% segment margin is lower than that of TransDigm (near 53% EBITDA margin). Additionally, Honeywell Aerospace's revenue mix is different from that of its peers, with a lower proportion coming from commercial aerospace. Similarly, Honeywell Automation's warehouse automation and productivity solutions segment has reported recent organic sales declines.

What Does It Mean for Investors?

The breakup makes sense, and the sum-of-the-parts argument does apply, but not by as much as many investors might think it will. Investors must be patient and hope that management can improve earnings over time. Honeywell looks like a decent value, but buying it depends on management's execution rather than the prospect of a valuation expansion resulting from a breakup.

In conclusion, Honeywell's breakup is a strategic move that aligns with the company's long-term growth strategy and addresses the concerns raised by the investor community. While the breakup is expected to release value for investors, the actual impact on Honeywell's stock price and valuation will depend on management's ability to execute and improve earnings over time. Investors should monitor the progress of the breakup and assess the performance of each new entity in their respective sectors to make informed decisions about Honeywell's stock.