One of the key advantages of investing in an industrial conglomerate like Honeywell (HON -0.91%) is that its diverse collection of businesses ensures the company can grow earnings across different economic conditions. However, it's also critically important that those earnings be invested in ways that add future growth. Fortunately, that's precisely what Honeywell's management is doing, and the company is well set for growth in the coming years.
Growth strategy matters
The importance of investing wisely for growth won't be lost on long-term Honeywell investors, and you only have to ask General Electric what it thinks about it to understand the matter. In 2001, during the final throes of the tenure of GE's legendary CEO Jack Welch, GE bid to acquire Honeywell. The bid failed, and Jeff Immelt took over GE only to lead the company to become a shadow of its former self -- a series of misjudged acquisitions in oil and gas and power while investing heavily in digital capability that ultimately proved premature and unprofitable.
In contrast, the tenure of Dave Cote (a former GE veteran) as CEO of Honeywell (2012-2017) almost overlapped Immelt's and saw a dramatic improvement in the company's fortunes. Current CEO Darius Adamczyk appears to be following in Cote's footsteps, and now Honeywell's $138 billion market cap eclipses GE's $89 billion. Moreover, Honeywell is well placed for long-term growth. Making the right investments matters, and there's evidence to suggest Honeywell's next decade will be as successful as its previous two.
Honeywell's growth initiatives
One key measure often used among industrial companies is the "new production introduction (NPI) vitality index." In Honeywell's case, this represents "the percent of total sales generated from organically developed new products introduced in the last three years." A higher number indicates a company successfully developing new products for its customers. As you can see below, Honeywell's NPI vitality index is impressive.
Data source: Honeywell presentations.
The NPI vitality index is also important because new products tend to carry greater pricing power and enable profit margin expansion. For example, the chart below shows just how well Honeywell has expanded profit margins over the years, notwithstanding an extremely difficult 2020 and 2021 in the aerospace industry -- Honeywell's single biggest end market.
Data by YCharts.
Long-term earnings drivers
Honeywell is on the right track and has plenty of long-term growth potential. During its 2022 investor day presentation, management highlighted the creation of businesses that the company started as so-called "breakthrough initiatives" (BTI).
- Honeywell Connected Enterprise is a cloud-based software business helping customers digitize their businesses, and has already surpassed $1 billion in revenue.
- Quantinuum is a quantum computing business Honeywell owns 54% of, and management believes it can hit $2 billion in sales from it by 2026.
- Sustainable Technology Solutions is a collection of clean and green energy businesses including plastics recycling, renewable fuels, carbon capture, hydrogen economy, and renewable energy storage. Management believes it will generate $700 million in sales in 2024.
- Unmanned Aerial Systems and Urban Air Mobility offer avionics and propulsion systems for air taxis, cargo drones, and light parcel delivery drones. Management believes their total addressable market will be $30 billion by 2030, and Honeywell has $7 billion in "wins" on projects and a $10 billion pipeline over the next five years.
Where Honeywell will be in the next decade
The company's current growth trajectory is excellent, with management forecasting 4%-7% annual revenue growth with margin expansion in tow. Moreover, its host of BTI businesses can potentially improve its revenue growth rate. All told, Honeywell is using its retained earnings wisely by investing for growth, and investors can feel comfortable that the business is set for long-term earnings and dividend growth.
