Honeywell's Breakup Is Done — The Market Missed This

Hey everybody. I've got another brief video for you. Kasey and I finally got around to doing an actual deep dive we felt was worth presenting to you on Honeywell, specifically Honeywell Technologies. The company is now finally split up into three primary pieces. Let me break that down for you. Before we get into that, just a shout-out to our friends at fiscal.ai, the sponsor of our video. We use Fiscal in our research every single day. Fantastic data platform, fantastic source of truth to get financial information, especially during earnings season. We are right in the midst of the busiest time of Q2 2026 earnings, and Fiscal gets those reports integrated into their platform really quick, oftentimes within just a couple of minutes. It's really great. Also, KPIs like the one here on Honeywell after its final split between Honeywell Technologies and Honeywell Aerospace. We'll talk more about these financial segments as we progress through this video. But check it out, fiscal.ai/csi gets you 15% off any paid plan. Check it out. Here is a look at the revenue segments for the business. Honeywell Aerospace is the red bar. The revenue is the red bar, and it is still reported this quarter for Q2 2026 by Honeywell Technologies because they were still the same company up until the end of the quarter. That's why we have this side by side here. But Honeywell Aerospace over the last couple of years growing at a CAGR of about 10%. And of the two businesses, Honeywell Aerospace and Honeywell Technologies, the aerospace segment currently is projecting the higher organic growth rate over the next three years. Perhaps this high single-digit growth rate continues if management's prediction holds true. Now, that leaves us with Honeywell Technologies. We have the bars, the blue, orange, and purple bars stacked. They reshuffled some of the segments, that's why the orange bar is a little spotty there. This is the slower-growing segment overall. You can see the industrial automation. Though the business lines got reshuffled as of late, was underperforming a bit. Let's talk about that because there are a couple more divestitures happening. So Q2 2026 segment results. The building automation segment of Honeywell, just like it sounds, especially for commercial buildings spanning everything from airports, to office buildings to data centers, property security, access management, alarm systems, sensors like fire alarms, you name it, that's what's housed within building automation. 9% organic growth in sales. Process automation and technology. This segment has had some bumpiness this year. They called this out in Q1 when the war in Iran started. So this is a struggling segment, but it is expected to return to growth the second half of this year. They had a pretty significant uptick in orders, up 24%, thanks to process technology in LNG or or liquefied natural gas demand. We'll talk a little bit more about this in a moment. And then industrial automation, the laggard here, 4% growth. Now let's focus on this pie chart on the right. The pie chart on the right now excludes the Honeywell Aerospace Technologies segment. And so you can see the general breakdown of the remaining business, $17 billion in sales last year. Most of it is going to fall into that process automation and building automation. The industrial automation is about to get a bit smaller as a percentage of the total. One reason is Honeywell Technologies just completed the acquisition of the Johnson Matthey Catalyst Technologies business. Now, Johnson Matthey is still its own separate publicly traded stock. Basically, the leftover business is focused on more renewable fuels, including hydrogen. What Honeywell wanted from this deal was catalysts that help with the refining of fossil fuels, including natural gas, also petrochemicals, plastics, and other such things. Also some renewable fuel catalysts as well. They finished the acquisition of this just about a week ago for 1.3 billion British pounds. This segment is going to get added to the process automation segment. There is a lot going on in Honeywell Technologies process automation business, but one of the main drivers is noted on that slide earlier, was the liquefied natural gas business or LNG. Now, there's a lot to this, but Honeywell has built out this basically full service, full equipment, supply chain partner for the energy industry. If you've been with us for a while, you probably know a couple years ago, we exited our position in Air Products. That was a result of two things happening. APD, Air Products divested its LNG liquefaction equipment and LNG business to Honeywell back in 2024. Not long after that, they got involved with a proxy war, they lost. A private equity company, has kind of wrested control. After that, we were out. At that point, though, was kind of when we put Honeywell on our radar, and we're curious to see how things would pan out as they worked through this split-up of the business to simplify things. That's where that recent acquisition is going to be housed. They do everything from selling chemicals for the refinement of this stuff, the liquefaction and heat exchangers to help liquefy the natural gas, later regasify it, help transporting it, both via pipeline as well as shipping across the sea. So a lot of stuff here in this energy transition business. And then finally, as Honeywell refocuses its portfolio, we mentioned a couple months ago they were selling two segments out of that smallest industrial automation segment, their productivity solutions and services for $1.4 billion to Brady Corp. That's essentially a competitor to Zebra Technologies, printers, scanners, barcode readers. Similar to that, the warehouse and workflow solutions segment getting sold to a private equity company called AIP for an undisclosed sum, probably means a very small amount of money. They did say that their warehouse and workflow solutions segment did about nine hundred and thirty-five million in sales in twenty-twenty five. That probably means that segment was losing money, or there was no clear pathway to it becoming robustly profitable. But in total, let's say this is going to add roughly one and a half billion, maybe one point six billion, maybe a bit more in cash to Honeywell's balance sheet. That's a positive. At the end of the quarter, nine point two billion in total cash and equivalents, and then blue, the equity investments at nearly seven and a half billion, that is Honeywell's equity stake in Quantinuum. So some much-needed cash will get added to the balance sheet from the sale of these two segments to Brady Corp and AIP. This will no doubt also help them pay off some debt. They do have a current portion of long-term debt coming due. That's about 5.3 billion. So maybe some of that gets repaid and the rest of it refinanced. Two and a half billion in short-term debt, and just over twenty-six point two billion in longer-dated debt, for a total of nearly thirty-four billion in debt on the balance sheet. So this is another big reason why Honeywell has needed to sharpen its focus and split the business up into smaller portions so that the debt gets split up across these more focused businesses, and the new companies can better manage that and make better capital allocation decisions on their own. Now, all of that said, all of this simplification of the business, some more asset sales, that have been deemed non-core parts of the new Honeywell Technologies, has led the company to increase its full year twenty twenty-six guidance. You can see that there in red on the left-hand side of the chart. Organic sales growth was increased from two to three percent, now three to four percent. Over the longer term, that growth rate is expected to bump up to a mid-single digit rate of growth over the course of the next three years. So we're already seeing that uptick in sales reported by Honeywell. That's not the real reason this is an interesting breakup, though. Obviously, the organic sales growth is very small, but it's the profit margin expansion. And again, that is already starting to show up. Their segment margin for full year twenty twenty-six, they also just increased from about twenty percent at the midpoint at the prior guide now up to twenty point five percent. Some of this has to do with the acquisition of that catalyst business, as well as the divestiture of some of those industrial automation businesses, the warehouse solutions, the barcode scanners. That is already contributing to better profit margin, and over the course of the next three years, Honeywell expects the segment margin to expand to a mid 20% range. So yes, the organic growth rate isn't so exciting, but the prospect of significantly higher profit margins paired with that makes this a lot more compelling. Now, one final note here regarding Quantinuum. Honeywell's stake in Quantinuum has dropped to 47% after the IPO, after shares were sold on the public market. So this is, at this point, the only quantum computing pure play we own here at CSI. It's a very, very small starter position. So we're not really worried about all of the stock volatility going on in it. It's just kind of think of it like a placeholder in our portfolio so that we keep tabs on this and the rest of the industry. Now that they are independent and publicly traded, Quantinuum will have its own earnings reports. In Q1 2026, 5.2 million in sales, 77 million in operating losses were reported. Obviously this is a company that has some revenue, but for all intents and purposes, this is nothing. This is a pre-revenue business, especially for a publicly traded company. Now, maybe Quantinuum continues to participate in the development of quantum computers. This develops very quickly. They were beneficiaries of some of those US investments and grants we talked about, a couple of months ago. Something worth monitoring and keeping a close eye on, but at this point, we don't have high hopes for this stock increasing rapidly, especially with the market cap already being at about 14 and a half billion with such a small revenue base and pretty sizable operating losses. The upshot here, though, is the IPO did raise nearly 1.7 billion in gross proceeds. Honeywell retains a 47% equity stake. We'll take that, so you kind of get that embedded in Honeywell if you own Honeywell. And management said it will share its plans in early 2027 for that stake in Quantinuum. They said they are supporters of the Quantinuum team. Honeywell is also a customer of Quantinuum and its quantum computers. But also, at least to our ear, it sounded like a hint at a possible further sale and divestiture of that equity stake now that there is a public market for Quantinuum. And that would obviously further pad Honeywell's balance sheet with cash or help them pay off debt. So let's pay attention to that as well. That might be a signal of some sort to the market that the Quantinuum stock might be overvalued at the time or just there's not enough visibility into the immediate term outlook for the company's financials that Honeywell deemed it better to just sell the stock and pay off debt, or maybe make more focused acquisitions in 2027. Management also hinted that M&A will be part of the new strategy now that Honeywell Technologies is independent. Honeywell Aerospace probably will also be involved in M&A just as Solstice Advanced Materials has been with that pending purchase of ESI as well. So, that's what we're looking at here overall. Now, I'll give you a couple of inputs that we started with. We're gonna just start with the 2026 guidance on adjusted earnings per share, and we're gonna use adjusted EPS because there's obviously a lot of strange accounting happening, distorting GAAP earnings per share because of the spinoffs, recent acquisitions, and divestitures. So we're gonna use adjusted EPS, and we're going to assume that the company achieves the high end of that range or close to the high end at $8.30. Now, as of market close yesterday on Thursday, July 23rd, Honeywell stock traded for about two hundred and forty-six dollars per share. So what gets us to, a fair value of about two forty-five, two hundred and forty-six dollars? The market bumped up the stock price on Honeywell just a bit after this earnings report. They liked what they saw. They liked the early progress, especially on those profit margins. So using the custom weight override on the reverse DCF calculator, we came up with a growth rate of 12% over the course of the next ten years and after this earnings update, we would say Honeywell Technologies looks roughly fair valued in our estimate. If the revenue growth accelerates to a mid to maybe closer to high single-digit rate for the next few years, there's some pretty strong operating profit margin. The balance sheet debt is paid off. We think twelve, thirteen percent is probably about right. That's probably the market has its finger on that being a fair value. What would make this a great buy? Well, if the stock price took a ten, fifteen percent, twenty percent hit, that would be interesting. Also, if management continuously increases its financial performance now that the company is split up and they are ahead of their three-year schedule to get those operating margins in the mid-twenty percent range, that would also be a positive. Okay. That is a wrap at our look on Honeywell Technologies. We will take another look later this year at Honeywell Aerospace when they report independently starting in Q3 2026. Until then, we're looking at some other stuff in the industry. So far, it looks like the expectation for data center CapEx will continue to rise in 2027, at least according to Google. That will probably be one of our next up-and-coming videos. Make sure you hit the subscribe button. Also, remember to check out fiscal.ai/csi for that 15% off your own subscription to their data platform. Take care, everybody.