Tuesday, Barclays (LON:BARC) reiterated an Overweight rating on Honeywell International (NASDAQ:HON) with a price target of $229.00. The firm's analysis follows recent news that Elliott Management has confirmed acquiring a $5 billion stake in Honeywell. Barclays' valuation is based on Sum of the Parts (SoTP) calculations, suggesting an average share price of $251, with a Free Cash Flow (FCF) SoTP of $267.
The investment by Elliott Management is seen as a non-surprising move by Barclays, given Honeywell's complex portfolio and modest earnings growth. The bank had previously indicated in a post-third-quarter report that Honeywell's status quo was likely to change by 2025. Additionally, Honeywell has been identified as a high-risk target for activist intervention, similar to Johnson Controls (NYSE:JCI) International, where Elliott also has a stake, and Fortive (NYSE:FTV), which recently announced significant leadership and structural changes.
Negative investor sentiment toward Honeywell has been reflected in a series of recent sell-side downgrades and year-to-date underperformance. Barclays highlights that Johnson Controls International saw a 25% increase in share price following initial reports of Elliott's involvement, outperforming the S&P 500's 13% rise over the same period.
Barclays agrees with Elliott's recommendation that Honeywell should consider separating its Aerospace segment to resolve the current discount to SoTP. Elliott's letter outlines a 2027 EBITDA - CapEx-based SoTP approach, which aligns with Barclays' preference for FCF-based SoTPs. Elliott's base and upside case SoTPs imply share prices of $321 and $374, respectively, if Honeywell separates into two public companies: Aerospace and Automation.
The note from Street Insider references Don Bilson at Gordon Haskett, who on October 8th suggested that Honeywell might be pushed by an activist to restructure. This speculation coincided with a Wall Street Journal report on the same day about Honeywell's plans to spin off businesses.
In other recent news, Honeywell International Inc (NASDAQ:HON). reported mixed third-quarter earnings, with an 8% year-over-year increase in adjusted earnings per share (EPS), reaching $2.58, despite sales falling short due to project delays and supply chain disruptions. The company's Aerospace segment maintained strong performance, marking the ninth consecutive quarter of double-digit growth. However, Honeywell revised its full-year 2024 earnings guidance and organic growth forecast, following Goldman Sachs' reiteration of its Buy rating on Honeywell with a price target of $227.00.
On a different note, Elliott Investment Management L.P. has proposed Honeywell's split into two separate entities, Honeywell Aerospace and Honeywell Automation, aiming to enhance shareholder value. Meanwhile, Wolfe Research downgraded Honeywell's stock from Outperform to Peer Perform due to operational challenges and a less optimistic outlook.
In terms of organizational changes, Honeywell's CFO Greg Lewis (JO:LEWJ) is transitioning to Senior Vice President of Honeywell Accelerator, with Mike Stepniak taking over as CFO in February 2025. The company completed four acquisitions in 2024, totaling over $9 billion, and plans to spin off its advanced materials division.
InvestingPro Insights
Recent data from InvestingPro adds depth to the analysis of Honeywell International's current position and potential. The company's market capitalization stands at $151.98 billion, reflecting its significant presence in the Industrial Conglomerates industry. Honeywell's P/E ratio of 26.1 (adjusted for the last twelve months as of Q3 2024) suggests investors are willing to pay a premium for its earnings, which aligns with Barclays' Overweight rating and the interest from Elliott Management.
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 policy may be attractive to value investors and could factor into Elliott's strategy for unlocking shareholder value. Additionally, the company's liquid assets exceeding short-term obligations and its operation with moderate debt levels provide financial flexibility, which could be crucial in any potential restructuring efforts suggested by Elliott Management.
The recent significant return of 15.08% over the last three months, as reported by InvestingPro, supports the positive sentiment surrounding the stock following Elliott's involvement. This performance echoes the trend observed with Johnson Controls International after Elliott's engagement, as mentioned in the article.
For readers interested in a more comprehensive analysis, InvestingPro offers 13 additional tips on Honeywell, providing a deeper understanding of the company's financial health and market position.
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