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After amassing a $5.0 bln stake in Honeywell (HON), Elliott Investment Management turned up the heat on HON's executives, pushing for a breakup of the industrial conglomerate that it believes would result in share gains of 51-75% over the next two years. It appears that HON's message was received as the company announced this morning that its exploring strategic alternatives for unlocking shareholder value, including the possible separation of its Aerospace business. Considering how successfully General Electric's separation has played out -- GE Aerospace (GE) has surged by 64% in 2024, while GE Vernova (GEV) has skyrocketed by 135% since the Apri1 1, 2024 spinoff -- it's easy to understand Elliott's argument for a breakup.

• While HON was already taking steps to simplify its business structure, including through the divestiture of its Personal Protective Equipment (PPE) business on November 22 for $1.25 bln, separating Aerospace and Automation would free each business to more fully focus on their own specific growth and capital allocation strategies. Furthermore, it could unlock more value, especially for Aerospace, which has been significantly outperforming the Industrial Automation, Building Automation, and Energy Solutions segments.
• For the nine months ended September 30, 2024, revenue for Aerospace Technologies increased by 15% to $11.47 bln and segment profit jumped by 18% to $3.2 bln. The segment, which manufacturers jet engines and a wide range of aircraft components, has benefited from a post-pandemic travel boom that has fueled a surge in new aircraft production and rising maintenance/repair/aftermarket needs. In contrast, Industrial Automation saw an 8.5% dip in revenue for the same period to $7.5 bln driven by soft demand for smart energy devices, PPE equipment, and warehouse automation products.
• The uneven performance between HON's segments has both weighed on the company's financial results and its stock price. When the company reported Q3 results on October 24, it posted a revenue miss and lowered its FY24 revenue guidance to $38.6-$38.8 bln from its prior outlook of $39.1-$39.7 bln, mainly due to weakness in Industrial Automation. That followed a Q2 earnings report in which it guided FY24 EPS below expectations. Accordingly, the stock has had trouble gaining ground in 2024, rising by about 9% compared to a 28% increase for the S&P 500 this year.

Even before Elliott entered the picture, HON was moving away from its diversified business model as it identified three primary trends to focus on: Automation, the Future of Aviation and Energy Transition. This new vision has resulted in the divestiture of its PPE business and its plans to spin-off the Advanced Materials business by the end of 2025 or early 2026. However, the moves don't go far enough in Elliott's eyes and now the stage is set for HON to take a page out of GE's playbook and break up the company. We believe such an action would be well received by the market as another aviation pure play would be made available to investors.