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Following in the footsteps of fellow industrial conglomerates 3M (MMM) and GE Aerospace (GE), Honeywell (HON) is looking to streamline and simplify the company by spinning off business units that aren't aligned with its long-term vision and growth strategy. Earlier this morning, HON announced that it plans to spin-off its Advanced Materials business into a new publicly traded company sometime in late 2025 or early 2026 in a move that it believes will help unlock greater shareholder value.

• The Advanced Materials unit, which is part of HON's Energy and Sustainability Solutions segment, manufactures additives and polymers that are used in a wide variety of products, such as plastics, paints, and asphalt. In 2Q24, the business performed well, achieving sales growth of 8%, led by continued strength in flourine products. If this momentum continues into 2025, then an Advanced Materials IPO should fetch plenty of interest.
• On that note, it's believed that the Advanced Materials business could be valued as much as $10.0 bln in an IPO. At that valuation, the IPO would be priced at about 2.6x estimated FY24 sales of $3.8 bln.
• It may seem counterintuitive to spin-off a business that's generating solid growth, but by separating it from HON, the company believes that Adanced Materials will be properly valued in the open market as a standalone entity. Furthermore, the spin-off will allow Advanced Materials to pursue its own, specific strategies for driving growth.
• For HON, the company will be in a better position to optimize the company around the three megatrends that it identified last October when it announced plans to realign the business into a simplified structure. More specifically, those megatrends are automation, the future of aviation, and energy transition.
• While not to the same degree as GE, which is now an aviation pure play, HON will be poised to better capitalize on the robust demand environment in both the commercial aviation and the defense markets. HON, which manufactures everything from engines to avionics systems to cockpit displays, has experienced eight consecutive quarters of double-digit organic growth in its Aerospace Technologies segment.
• Meanwhile, the Energy and Sustainability Solutions segment is aligned with the push to reduce emissions and improve the resiliency and efficiency of the power grid. In Q2, sales edged higher by 3% on an organic basis, bolstered by growth in refining catalysts and aftermarket services.

Overall, we believe that the market will reward HON for simplifying its business structure and aligning itself with its key growth strategies, just as it has done with GE and MMM. With shares languishing around the unchanged mark for 2024, the stock could use a positive catalyst, and this spin-off develop could ultimately provide it with a boost.