TD Cowen has reaffirmed its positive stance on Honeywell International (NASDAQ: NASDAQ:HON), maintaining a Buy rating and a price target of $230.00.
The firm highlighted Honeywell's announcement of a tax-free spin-off of its Advanced Materials (AM) subsegment, expected to occur between late 2025 and early 2026.
The AM subsegment, which is part of the Electronic and Safety Solutions (ESS) segment, generates approximately $3.8 billion in sales and has an EBITDA margin of over 25%.
The spin-off of AM, which represents about 10% of Honeywell's sales and EBITDA, is anticipated to be dilutive to the remaining Honeywell operations by roughly the same percentage, excluding the impact of stock buybacks and other compensatory actions.
Honeywell's decision to divest AM is in line with its strategic focus on three "megatrends": automation, the future of aviation, and energy transition. The company noted that AM's more cyclical nature, higher capital expenditure requirements, and complex supply chain do not align with these targeted areas.
Honeywell's CEO Kapur had previously indicated plans to divest approximately 10% of the company's sales, and the AM spin-off appears to be a significant step in fulfilling this strategy. The company has also stated that it does not foresee any major liability issues stemming from the divestment, such as those related to per- and polyfluoroalkyl substances (PFAS).
In terms of financial structuring, Honeywell's CFO did not specify the leverage that will be applied to AM post-spin-off but mentioned that it would be just below investment grade as a standalone entity.
AM's business verticals include refrigerants, fluorine products, specialty chemicals, semiconductor materials, and others. Notable brands within AM include Solstice, Spectra, and Aclar. The closest competitors to AM are Arkema and Chemours, which trade at relatively low multiples and have EBITDA margins that fall short of AM's performance.
In other recent news, Honeywell has been making significant strides in its business operations. The company announced plans to spin off its advanced materials business, a move expected to enhance strategic focus and financial flexibility.
The new entity, projected to generate about $3.8 billion in revenue, is set to be created by the end of 2025 or early 2026. In addition to this, Honeywell has raised its annual cash dividend from $4.32 to $4.52 per share, marking its 15th dividend increase in 14 consecutive years.
Honeywell has also announced a partnership with Qualcomm (NASDAQ:QCOM) Technologies to develop a Multi-Modal Intelligent Agent for Honeywell mobile devices, aimed at improving efficiency in distribution centers and retail industries. This AI-enabled agent is expected to be available in early 2025.
Analyzing the company's stock, Mizuho Securities maintained an Outperform rating, suggesting potential for mergers and acquisitions, while Morgan Stanley initiated coverage with an Equalweight rating, expressing caution about Honeywell's near-term recovery prospects.
InvestingPro Insights
To complement TD Cowen's positive outlook on Honeywell International (NASDAQ:HON), InvestingPro data offers additional insights into the company's financial health and market position. Honeywell's market capitalization stands at $133.05 billion, reflecting its significant presence in the Industrial Conglomerates industry. The company's P/E ratio of 22.8 (based on the last twelve months as of Q2 2024) suggests investors are willing to pay a premium for its earnings, which aligns with the company's strategic focus on high-growth areas like automation and energy transition.
InvestingPro Tips highlight Honeywell's strong dividend history, having raised its dividend for 14 consecutive years and maintained payments for 40 years. This consistent dividend growth, coupled with a current dividend yield of 2.22%, may appeal to income-focused investors. The company's ability to sustain and grow its dividend underscores its financial stability, which could be reassuring as it prepares for the Advanced Materials spin-off.
Another relevant InvestingPro Tip notes that Honeywell operates with a moderate level of debt. This conservative financial approach could provide flexibility as the company navigates the upcoming spin-off and continues to invest in its core "megatrends" strategies.
For readers interested in a more comprehensive analysis, InvestingPro offers 7 additional tips that could provide further insights into Honeywell's investment potential.
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