On Wednesday, RBC (TSX:RY) Capital Markets updated its stance on Honeywell International Inc. (NASDAQ:HON), increasing the stock's price target to $253 from the previous $213, while retaining a Sector Perform rating.
The adjustment follows the revelation that activist investor Elliott Management disclosed a significant investment in Honeywell on November 12, 2024. Elliott Management has acquired more than $5 billion worth of Honeywell shares, amounting to a 3.5% stake in the company.
Elliott Management has also advocated for Honeywell to undergo a strategic restructuring. They suggest dividing the company into two separate entities: an Aerospace RemainCo and an automation-focused SpinCo. According to RBC Capital, this recommendation aligns with the broader trend in the sector where companies are simplifying their portfolios by splitting into more focused businesses.
The analyst from RBC Capital acknowledged Honeywell's recent struggles in the stock market, noting that the company's shares have underperformed partly due to a preference among investors for stocks with higher cyclical leverage as opposed to Honeywell's stable, high-quality earnings profile. Despite the underperformance, Honeywell has been recognized for its consistent and robust financial results.
The analyst also pointed out potential counterarguments to Elliott Management's proposal. Critics might argue that the proposed SpinCo could have additional opportunities for break-up, which may not be fully realized by a simple two-way split. Another concern is the modest 3% implied sum-of-the-parts discount, which suggests that the market may not be significantly undervaluing Honeywell's business units as separate entities.
The recent developments with Elliott Management's investment and the subsequent price target increase by RBC Capital indicate a new chapter for Honeywell International, as market participants and analysts closely observe the potential impact of these strategic suggestions on the company's future.
In other recent news, Barclays (LON:BARC) and Goldman Sachs (NYSE:GS) have maintained their respective price targets on Honeywell, with Barclays reiterating an Overweight rating and a price target of $229.00, and Goldman Sachs maintaining a Buy rating with a price target of $227.00. 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.
However, Wolfe Research has downgraded Honeywell's stock from Outperform to Peer Perform due to operational challenges and a less optimistic outlook. This decision ends a nearly two-decade-long period of outperforming the market.
Meanwhile, Honeywell 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.
In organizational changes, Honeywell's CFO Greg Lewis (JO:LEWJ) is set to transition 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. These recent developments reflect Honeywell's strategic focus on future growth.
InvestingPro Insights
As Honeywell International Inc. (NASDAQ:HON) faces potential restructuring proposals from Elliott Management, InvestingPro data provides additional context to the company's current financial position. Honeywell's market capitalization stands at $152.1 billion, reflecting its significant presence in the Industrial Conglomerates industry. The company's P/E ratio of 26.94 suggests that investors are willing to pay a premium for its earnings, which aligns with RBC Capital's observation of Honeywell's stable, high-quality earnings profile.
InvestingPro Tips highlight Honeywell's strong dividend history, having raised its dividend for 14 consecutive years and maintained payments for 40 years. This consistency in shareholder returns may be a factor in Elliott Management's interest and could play a role in any restructuring discussions.
The company's recent performance is noteworthy, with a 19.55% price total return over the past three months, outpacing its year-to-date return of 13.36%. This recent momentum, coupled with analysts revising earnings upwards for the upcoming period, suggests a positive outlook that could influence the ongoing strategic discussions.
For investors seeking a deeper understanding of Honeywell's potential, InvestingPro offers 11 additional tips, providing a comprehensive analysis to inform investment decisions in light of these recent developments.
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