As the headline says, it is time to start thinking differently about Honeywell International (HON). The company is known as being one of the last great diversified industrial giants, and that definition still applies. However, what many investors might be missing is that Honeywell is an aggressive investor in cutting-edge technologies, and those businesses are going to significantly add to the value of the company in a few years.
Honeywell's growth initiatives
Pause for a second and consider investing in a small company backed by substantive investors that's on track to grow its quantum computing-based revenue from $20 million in 2022 to around $2 billion in 2026.
At the same time, the small company has a sustainable technology company (green fuels, feedstocks for recycled plastics, etc.) set to generate $700 million in revenue by 2025. Moreover, this is not any old start-up company with wide-eyed dreams; it's backed by a tried and tested management team with deep pockets.
Such a company would be valued at multiples equivalent to several times its sales. That's the sort of value that investors should start to price into Honeywell stock. The reason is that CEO Darius Adamczyk told investors to expect those revenue figures for two of Honeywell's highest-growth businesses in the coming years.
Growth investments cost money
Of course, transitioning to this kind of thinking won't come easily, and the investments necessary to get there will hold back earnings and free cash flow (FCF) in the near term. However, that's the flip side of the coin, and investors thinking about Honeywell as a diversified industrial might stress over the lost earnings and cash flow.
To put some figures on the matter, management noted that its full-year 2022 earnings before interest, tax, depreciation and amortization (EBITDA) would be negatively affected by $150 million due to investment in its quantum computing business, Quantinuum. Moreover, capital investments made to support growth in Quantinuum will eat into FCF to the tune of $200 million to $300 million in 2022.
To put that figure into context, Honeywell is currently valued at $132 billion, a figure equivalent to 23.2 times its trailing FCF. If investors price out the stock based on FCF, then the "lost" $300 million could cost the market cap around 23.2 multiplied by $300 million -- $6.95 billion in market cap.
Two ways of thinking
If you are taking a glass-half-full approach and getting optimistic about the growth investments, then the news about the investments is a good thing. After all, investors put money in stocks because they feel confident that management can generate better returns on the money than they (investors) can.
On the other hand, the glass-half-empty approach laments that Honeywell's earnings and cash flow are being held back and downgrades the stock accordingly. This approach shaves off some of the market cap as outlined above.
The bull and bear debate over Honeywell
Unfortunately, the bull and bear debate over the stock won't stop here. Not least because Honeywell, in line with many other industrial peers, is expecting a formula of first half affected by supply chain pressures and cost increases, followed by a better second half in 2022.
As such, investors looking at the stock as a diversified industrial will have to tolerate a mix of earnings and margin headwinds from the increased investments and the uncertainty from waiting until the second half for an acceleration in growth at Honeywell.
Moreover, management prepared investors for a challenging first quarter, with organic growth forecast to be in the range of a 2% decline to an increase of 1%. Meanwhile, adjusted EPS is forecast to be in the range of $1.80 to $1.90, implying a decline of 6% to a decline of 1%.
In addition, CFO Greg Lewis told investors that "with the supply chain impacts that we have been facing, those will continue to drive higher inventory levels, dampening our cash generation in the short term."
It all adds up to a first quarter that's likely to look a little weak on a headline basis.
Is Honeywell stock a buy?
If you are looking at the stock purely as a diversified industrial, then the answer is probably "no." Despite the fall in the share price, Honeywell is still a highly rated stock, and the slightly disappointing 2022 guidance means the stock isn't quite at a level enticing enough for investors not taking the long view.
However, for investors looking for a back-door way to play quantum computing and sustainable technology trends, Honeywell may well represent a great way to do so without considering the nosebleed valuations and blue sky assumptions that usually come with such investments.
Whichever way you look at it, Honeywell's growth investments are changing the investment proposition over the stock.