Honeywell International stock has returned 25% in the last 5 years, a significant underperformance to the S&P 500 Industrials’ 76% return. Thus subdued share price, the recent bullish momentum, and a $5 billion stake by activist investor Elliott Management are three good reasons why buying the stock at current levels is worth it.
Honeywell International, Inc. is a technology and manufacturing company that serves industries like aerospace, building technologies, and performance materials. It was founded in 1906 and is headquartered in Morris Plains, New Jersey.
The company’s leading products include avionic systems, turbine engines, and safety technologies for commercial and defense aerospace. It also makes building access control systems, fire detection and suppression systems, and heating, ventilation, and lighting control systems.
The company makes advanced materials and personal protective equipment, sensors, and safety systems for industrial applications as well.
The revenue of the company is well diversified, with 35% of it coming from the Aerospace division. Building Technologies represent roughly 28%, Performance Materials and Technologies contribute about 22%, and Safety and Productivity Solutions amount to 15% of the total revenue generated by the company.
Honeywell’s end markets cover a wide variety of industries like aerospace, healthcare, manufacturing, logistics, retail, and energy. Some of its main customers include Boeing, Unitech Technologies Corporation, General Electric, American Airlines, and the U.S. government.
The reason for our bullish thesis lies in the company’s recent corporate restructuring. In October, it announced that the advanced materials unit was being spun off into a separate listed entity. The stock price reacted positively to this news.
The news of Elliott Management taking a $5 billion stake in the company is also likely to contribute further bullish momentum. The activist investor believes the company is at an inflection point and separating its Aerospace and Automation divisions can improve the business performance, eventually benefitting the shareholders through share price appreciation.
The company’s industrial automation division has been underperforming while the business as a whole is struggling to deal with cost pressures. The company reduced its full-year revenue and profit forecast after the recent Q3 earnings.
Even though the industrial automation segment is down by 5%, it is more than compensated for by the double-digit topline growth in the Aerospace and Building Automation departments. This suggests the overall business is doing well in terms of demand and better management can significantly improve the operating profits.
This is also backed by the fact that the US airline capacity is just normalizing after the COVID-19 downturn. Aerospace is the largest source of revenue for the company and growth in the aviation market should directly impact the company’s topline.
Moreover, a 1.93% dividend yield gives investors exactly the kind of safety they need when betting on improved management of a company. We’re bullish on the stock and believe the activist investor pressure will force the company to further improve its corporate structure, resulting in a leaner business model.
Honeywell isn’t on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 50 hedge fund portfolios held HON at the end of the second quarter which was 52 in the previous quarter. While we acknowledge the potential of HON as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as HON but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
