Separation Into Automation, Aerospace, And Advanced Materials Will Improve Alignment And Flexibility

Key Takeaways

• Strategic separation into three companies aims to enhance growth and value through focused operations, benefiting from clearer strategy alignment and operational independence.
  
• The company's acquisitions and capital deployment strategy, including share buybacks, are central to future earnings growth, efficiency, and shareholder value.
  
• Separation and integration efforts, along with external economic and geopolitical pressures, may strain Honeywell's profitability and operational margins in the near term.

Catalysts

Engages in the aerospace technologies, industrial automation, building automation, and energy and sustainable solutions businesses in the United States, Europe, and internationally.

• Honeywell's strategic separation into three focused public companies—Automation, Aerospace, and Advanced Materials—aims to unlock value by enhancing strategic focus, operational independence, and financial flexibility. This separation is expected to drive long-term revenue growth and improved earnings for each business due to clearer strategy alignment.
  
• The company is poised to benefit from its recent acquisitions, which contribute substantially to projected 2025 sales and profit growth. These acquisitions are expected to become part of the organic growth by the end of 2025, potentially enhancing earnings through accretive sales.
  
• Honeywell's Automation business is well-positioned to capitalize on increasing digital transformation and energy security trends globally. It is expected that favorable market dynamics such as automation technology advancements and industrial AI could boost revenue and improve margins.
  
• Aerospace is likely to sustain high growth with robust demand from both traditional and emerging markets such as autonomous and electrification-driven growth factors. Efforts to expand capacity and supply chain efficiency could potentially support margin improvement.
  
• Honeywell's capital deployment strategy, including continued share buybacks and strategic M&A activity, aims to enhance earnings per share, provide value to shareholders, and optimize operational efficiencies, reflecting confidence in the company’s valuation and growth prospects.

Honeywell International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Honeywell International's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.8% today to 16.9% in 3 years time.
• Analysts expect earnings to reach $7.6 billion (and earnings per share of $12.03) by about March 2028, up from $5.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.9x on those 2028 earnings, up from 23.9x today. This future PE is greater than the current PE for the US Industrials industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

Honeywell International Future Earnings Per Share Growth

Risks

• The separation of Automation and Aerospace Technologies into independent companies involves significant one-time costs of $1.5 billion to $2 billion, which might impact net margins and overall profitability in the near term.
  
• Challenging global macroeconomic conditions and evolving geopolitical situations could exert pressure on Honeywell's short-cycle demand, impacting sales and revenue growth expectations.
  
• Uncertainty regarding the magnitude of tariffs and their impact on operational costs could affect earnings and profit margins.
  
• The integration of recent acquisitions, such as the CAES acquisition, carries potential integration risks that may dilute operating margins, particularly in Aerospace.
  
• The anticipated strong investment-grade credit rating for Automation and Aerospace, versus a non-investment-grade rating for Advanced Materials, may affect the cost of capital and financial flexibility across the distinct companies, potentially impacting their earnings and financial health.

Valuation

• The analysts have a consensus price target of $237.341 for Honeywell International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $196.12.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $44.6 billion, earnings will come to $7.6 billion, and it would be trading on a PE ratio of 24.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of $209.74, the analyst price target of $237.34 is 11.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.