Industrial conglomerate Honeywell International (HON +3.75%) certainly has more than its fair share of headwinds from the COVID-19 pandemic, but it also has some growth opportunities. With the economic recovery increasingly looking like it's going to be disjointed with different industries recovering at different speeds, it makes sense to focus on what's working at Honeywell. Right now, that's its safety and productivity solutions (SPS) business.
How Honeywell makes money
The SPS segment only contributed 10% of segment profits in 2019, but it's growing in importance given the fact that it's dealing with COVID-19 better than the other segments.
|
Segment Organic Sales Growth YOY |
Q4 19 |
Q1 20 |
Q2 20 |
Q3 20 Guidance |
|---|---|---|---|---|
|
Aerospace |
7% |
1% |
(27)% |
Down more than 25% |
|
Honeywell Building Technologies (HBT) |
3% |
(6)% |
(17)% |
Down more than 10% |
|
Performance Materials and Technologies (PMT) |
3% |
(5)% |
(17)% |
Down more than 10% |
|
Safety and Productivity Solutions (SPS) |
(11)% |
(9)% |
1% |
Up less than 7% |
Data source: Honeywell presentations. YOY = year over year.
Digging into the details of the SPS segment, it's clear that all four of its constituent businesses (shown in the chart below) have good growth prospects.
Revenue share by business. Data source: Honeywell presentations.
Investor update
SPS president and chief executive officer John Waldron recently updated investors on the near and long-term prospects for the segment. What he had to say will also interest investors in industrial companies and competitors 3M (MMM +2.60%) and Zebra Technologies (ZBRA +0.60%).
Safety solutions
The safety solutions segment provides personal protective equipment (PPE) and gas detection and analysis systems. The near-term growth opportunity is with N95 masks, and Waldron outlined that Honeywell would end 2020 manufacturing 25 times the number of masks it started the year with. Indeed, 3M has also been ramping capacity in response to the surging demand. Of course, the key question is, what will demand be like when the pandemic dies out?
It's an almost impossible question to answer, but Waldron believes the market has "changed pretty fundamentally." While some retraction in demand is inevitable, it's inconceivable that public awareness around the need for health and hygiene is going to go away anytime soon. Frankly, it seems likely that demand for N95 masks will indeed stay elevated for some time, and that's good news for 3M and Honeywell.
Honeywell has a growth opportunity through selling warehouse automation solutions. Image source: Getty Images.
Warehouse automation
One of the very few net beneficiaries of the pandemic, Honeywell Intelligrated, provides material handling automation and software and is seeing surging growth from e-commerce fulfillment centers. In fact, Intelligrated orders rose a whopping 300% in the second quarter.
Wolfe Research analyst Nigel Coe asked if the current torrid rate of growth was "a pull forward, or is it somewhat more sustainable?" and Waldron insisted it was a "structural change" which had been accelerated due to the pandemic.
Given the surging e-commerce revenues at package delivery companies UPS and FedEx -- both of which surprised investors on the upside -- it seems likely that the pandemic is resulting in a shift in consumer preferences toward online shopping and away from retail. As such, Intelligrated looks like it has a long pathway of growth ahead of it.
Productivity solutions
The business provides mobile and barcode scanners, computers, voice automation technology, and RFID solutions, with its key competitor being Zebra Technologies. This is arguably the most interesting of Honeywell's SPS businesses right now for two main reasons:
- After a period of underperformance, notably when compared with Zebra, Waldron believes it's positioned to return to growth in the second half.
- With Intelligrated expanding warehouse automation and software sales, there should be an opportunity to cross-sell barcode scanners and printers to the same sites.
Waldron lauded the company's new scanning technology, which is seen as driving new sales, but in reality it's a pretty good end market anyway. For example, Zebra started 2020 predicting net sales growth of 4% to 6%, a figure in line with its recent history of mid single-digit growth. If factories and facilities are going to become more automated, they will still require humans to monitor the process -- which is where barcode scanners come in.
Sensing and internet of things
Finally, the sensing and internet of things (IoT) business is seeing near-term weakness as factories remain closed and operating on a partial basis.
That said, there's little doubt that the IoT remains a long-term growth market. In fact, it's part and parcel of the trend toward digitizing factories -- a trend that might receive a boost as companies seek to automate production in response to the supply chain difficulties created by the pandemic.
Looking ahead
All told, Honeywell's SPS segment is proof that some sectors of the economy are doing well, and it pays investors to be selective over how they invest. Areas like warehouse automation and PPE are working right now, while mobile scanners and IoT solutions are set for improvement in the coming quarters. These are some of the areas that investors should be looking to invest in.
As for Honeywell, the strength in the SPS segment is ample demonstration of the diversity in its end markets, which should help support its business as it battles to overcome weak aviation markets.
