Honeywell's Shares Decrease Post Split Announcement Despite GE's Spin-Off Triumph
Honeywell, based in Charlotte, North Carolina, known for its operations in aerospace, building automation, industrial automation, and energy and sustainability solutions, sparked controversy on February 6 when it announced plans to split into three companies in an attempt to boost stock returns, according to MarketWatch. Since then, the company's shares have plummeted by 10%. But is the decrease due to investor dislike of the separation or dissatisfaction with the company's revenue and earnings forecast?
Activist investor Elliott Investment Management pushed for the split, which could potentially increase Honeywell's stock price by as much as 75% within the next two years. Meanwhile, analysts remain skeptical about the company's stock and have unanswered questions regarding its future.
Let's delve deeper into Honeywell's strategy and financial performance, starting with the company's declaration of splitting its automation and aerospace technology businesses and its advanced-materials unit by the second half of 2026. Elliott Investment Management encouraged this split, predicting a substantial increase in the stock's value.
However, investors and analysts have numerous concerns regarding Honeywell following its Q4 2024 financial report. Honeywell released key financial figures, including:- Fourth-quarter 2024 net sales: $10.09 billion, up 6.9% from the previous year and $250 million higher than the FactSet consensus.- Q4 2024 net income: $1.29 billion, up 2.4% from the previous year.- Q4 2024 adjusted earnings per share: $2.47, down 8.4% and $0.15 above the FactSet consensus.- Q4 2024 free cash flow: $1.9 billion, down 27% but above the FactSet consensus.
Despite these figures, Honeywell's 2025 revenue forecast fell $1.2 billion short of FactSet's consensus. Moreover, the company's 2025 forecast for adjusted earnings per share and free cash flow fell below FactSet's average by $0.62 and $800 million, respectively.
Conglomerate breakups have major implications for shareholders and the companies themselves. GE, one of the few remaining conglomerates, successfully transformed its aerospace, energy, and healthcare units into stand-alone businesses. The new businesses have demonstrated remarkable growth and profitability, resulting in significant market value increases. However, conglomerate breakups face mixed results. Companies like United Technologies, Danaher, and Alcoa have experienced stronger performances and higher multiples after splitting. While others, such as 50% of the 350 public spin-offs between 2000 and 2020, have failed to create more shareholder value two years after the split, with 25% even experiencing value erosion.
Effective breakups require answering critical questions, like whether the industry the spinoff focuses on holds high growth and profit potential, if the spinoff excels in critical activities, and if the company fields a leadership team that attracts and motivates industry-leading talent.
Assessing Honeywell's financial reports, investment prospects, and breakup plan, it's worth considering the following:
- Will Honeywell's decision to separate deliver the desired outcomes? Can it unlock the company's full potential, providing greater financial flexibility, and simplifying strategic focus?
- Can the three new entities capitalize on global megatrends, outperform competitors, and invest in innovation to sustain market share growth?
- Are Elliott Investment Management and other investors optimistic about the breakup's value creation and incentivized to invest in the new Honeywell entities?
- What challenges or obstacles do Honeywell and its investors need to face amid the breakup process?
- How can Honeywell manage the disruptions and potential costs associated with the separation process, and what strategies should it employ during the early phases to meet investor expectations?
With these questions in mind, we wait for the outcome of Honeywell's transformative decision, optimistic about its long-term potential. Striving for competitive advantage and fostering innovation, the company can thrive in a rapidly evolving market.
- Amidst the market volatility, investors are closely watching Honeywell's money management during the separation process, hoping for strategic decisions that can boost the company's stock prices in the markets.
- The success of Honeywell's markets strategy after the split hinges on whether the new entities can leverage their respective sectors' growth potential and exhibit strong financial performance.
