Honeywell's Q4 Earnings Beat: A Split Decision

Honeywell International Inc. (HON) reported fourth-quarter earnings that surpassed expectations, but the stock fell as investors digested the news of a planned split into three public companies by 2026. Let's dive into the key takeaways and the implications of this strategic move.



Q4 Earnings Beat

* Revenue: $10.1 billion, up 7% YoY (organic: +2% YoY)
* Earnings per share (EPS): $1.96, up 3% YoY
* Adjusted EPS: $2.47, down 8% YoY (up 9% excluding the $0.45 impact of the Bombardier agreement)
* Operating margin: 17.3%, up 50 bps YoY
* Segment margin: 20.9%, down 350 bps YoY (down 70 bps YoY excluding the impact of the Bombardier agreement)

Honeywell's strong performance was driven by double-digit organic sales growth in defense and space, and building solutions. The company also reported a record backlog of $35.3 billion, up 11% YoY.

2025 Outlook

* Sales: $39.6 billion - $40.6 billion
* Organic sales growth: 2% - 5%
* Segment margin: 23.2% - 23.6%, with expansion of 60 to 100 bps
* Adjusted EPS: $10.10 - $10.50, up 2% - 6%
* Operating cash flow: $6.7 billion - $7.1 billion
* Free cash flow: $5.4 billion - $5.8 billion

Excluding the impact of the Bombardier agreement, Honeywell expects organic sales growth of 1% - 4%, segment margin down 10 to up 30 basis points YoY, and adjusted EPS down 2% to up 2% YoY.

Planned Split into Three Public Companies

Honeywell announced that its Board of Directors has decided to pursue a full separation of its Automation and Aerospace businesses, in addition to the previously announced spin-off of its Advanced Materials business. This move is expected to unlock significant shareholder value and create three industry-leading public companies with distinct strategies and growth drivers.

The separation is expected to be completed in the second half of 2026 and structured to be tax-free for Honeywell shareholders. The company is on track to surpass its commitment of deploying at least $25 billion toward high-return capital expenditures, dividends, share repurchases, and accretive acquisitions by 2025.

Investment Implications

The planned split is expected to unlock significant shareholder value and enhance long-term growth prospects for Honeywell. However, investors should be aware of the potential challenges and risks associated with the separation, such as integration and transition costs, potential loss of synergies, market acceptance and valuation, and regulatory and tax implications. To mitigate these risks, Honeywell could consider a phased implementation, retention of key talent, clear communication strategy, thorough due diligence, and flexibility and adaptability during the separation process.

In conclusion, Honeywell's Q4 earnings beat expectations, but the planned split into three public companies by 2026 has left investors with mixed feelings. While the separation is expected to unlock significant shareholder value and enhance long-term growth prospects, investors should be aware of the potential challenges and risks associated with this strategic move. As always, it is essential to conduct thorough research and monitor the situation closely to make informed investment decisions.