Will Honeywell International Inc. (NYSE:HON) Spinoffs Create Value for Investors?
Honeywell International Inc. (NYSE:HON) recently completed a portfolio review and announced that it would spinoff two of its business units. The affected business units are its Transportation Systems and the Homes/ADI Global Distribution business units, which will be split into separate publicly traded companies by 2019.
Honeywell is set to spinoff two business units by the end of next year
The spinoff will unlock significant value for shareholders
The company will retain its aerospace business unit
The company under the leadership of new CEO, Darius Adamczyk, has chosen to defy the activist investor Dan Loeb of Third Point hedge who wanted Honeywell to spin off its aerospace business. Loeb’s argument was that the aerospace business keeps the company trading at a discounted valuation, however, the aerospace business is Honeywell’s biggest profit-generator.
A closer analysis of the company reveals that it trades at a P/E ratio of 22x, which is a discount as compared to other industrial conglomerates such as General Electric Company (NYSE:GE) whose P/E is 27x, and Danaher Corporation (NYSE:DHR), which trades at a P/E ratio of 28x.
It is my belief that the two spinoffs will unlock significant value for investors, while the remaining business units in the legacy company will have more synergies. The two spinoffs barely had any synergies with the rest of the Honeywell businesses and might fare much better as independent companies.
The two spinoffs will cause Honeywell to lose about $7.5 billion in annual revenues, but the company is likely to experience massive organic growth in its revenues from the remaining business units. The spinoffs also mean that Honeywell will be more concentrated in the aerospace industry given that this business unit generates most of its revenues and profits.
Honeywell trades at a premium as compared to other companies in the aerospace industry such as United Technologies Corporation (NYSE:UTX), which trades at a P/E ratio of 18x. Last year, the aerospace business generated about 40% of Honeywell’s overall profits and this figure is likely to go up after the two spinoffs.
The company can unlock significant value in its aerospace business by merging it with the aerospace business of another company such as GE in order to eliminate its current discounted valuation.
The two spinoffs were low-margin business that had experienced topline pressure recently, which means that the remaining business units are more valuable to the company as they have high margins and they operate in high-growth industries.
The question remains whether Honeywell is a good investment at its current valuation.
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