Only a few years ago, the market could boast three major diversified industrial players whose fortunes were intertwined: Honeywell International (HON 0.22%), General Electric (NYSE: GE), and United Technologies. The latter doesn't get the funny brackets and ticker anymore because it was broken up into three different companies: Raytheon Technologies (aerospace & defense), Carrier Global (heating, ventilation, and air conditioning), and Otis Worldwide (elevators). Meanwhile, GE has one more spin-off before becoming a solely focused aerospace & defense company.
All of this leaves Honeywell left as the last major diversified industrial standing. Let's take a look at whether that's the best strategy for the company or not.
Honeywell changes its CEO
The announcement that Chairman and CEO Darius Adamczyk would become the executive chairman in June, leaving the way for COO Vimal Kapur to become the new CEO, surprised the market. Adamczyk didn't appear to be under any pressure, and given that he and Kapur are the same age, it's hardly a natural progression. Such changes always cause investors to take a step back and consider where the company's future direction will be.
Five things Darius Adamczyk achieved as CEO
Adamczyk's tenure as CEO (2017 to 2023) will be remembered fondly. He successfully navigated the pandemic and managed changes required of the aerospace industry (Honeywell's largest end market) by new government leadership, and the stock price is up nearly 60% since he took over. Here are five things that characterized his tenure and Honeywell's current strategic direction:
- Kept the diversified industrial conglomerate structure, and it served shareholders well during the pandemic.
- Engaged in reshaping the portfolio, notably through the spin-offs of non-core businesses Resideo and Garrett Motion.
- Established Honeywell's software and Internet of Things (IoT) business, Honeywell Connected Enterprise (HCE), to further the aim of becoming a software/industrial company.
- Continued investing in breakthrough technologies, such as a quantum computing business (Quantinuum), unmanned aerial systems, urban air mobility, and its Sustainable Technology Solutions (including carbon capture, renewable fuels, renewable energy storage, etc.).
- Maintained a rock-solid and conservative balance sheet.
The following two charts help to illustrate the points above and highlight that keeping the conglomerate structure was a good thing for Honeywell in recent years. For example, the aerospace segment's slump in 2020 was partially compensated by the safety & productivity solutions (SPS) business that includes personal protective equipment and e-commerce warehouse automation -- two businesses benefiting from the pandemic. Moreover, Honeywell Building Technologies, or HBT, and Performance Materials & Technologies (PMT) returned to grow more quickly than the aerospace segment.
Data source: Honeywell presentations.
Moreover, the combination of diversified end markets and Honeywell's conservative balance sheet meant that Honeywell maintained excellent earnings before interest, taxation, depreciation, and amortization (EBITDA) to net-debt ratio. As you can see below, it compares favorably with other aviation giants like Raytheon Technologies (supported by its defense business) and Boeing.
Data by YCharts
All told, the industrial conglomerate structure works, and Honeywell's recent excellent results and growth trajectory confirm that.
Being an industrial conglomerate works, but...
Adamczyk's steady approach has produced a company full of growth initiatives with exposure to many attractive themes, including digitization, sustainable technology, embedded software, quantum computing, air taxis, etc.
However, if Adamczyk deserves some criticism, it comes from being overly conservative with mergers & acquisitions. As demonstrated above, Honeywell maintained a strong balance sheet and could have made a move for a company like the advanced composite technology company Hexcel (HXL -0.03%) during the slump. Hexcel was open to exploring strategic options as it had an agreement to merge with Woodward in 2020 (later called off due to the pandemic), and Hexcel's aerospace end markets would have dovetailed perfectly with Honeywell's aerospace operations, as would Hexcel's industrial end markets with Honeywell's materials business.
Moreover, a deal for Hexcel would hardly have been complicated for Honeywell financially.
Data by YCharts
Where does Honeywell go from here?
Is Honeywell on the right path? The answer is "yes." The conglomerate structure continues to serve Honeywell well. Instead, the criticism is that Honeywell is possibly not enough of an industrial conglomerate, and management didn't use its financial stability in the slowdown to take advantage of acquisition activities.
Perhaps Kapur will address this as CEO, or Adamczyk will focus on it as Executive Chairman -- something to look out for.
