Honeywell

Honeywell Technologies reported second-quarter organic sales growth of 4% year over year. Spinoff- and mergers and acquisitions-related charges masked underlying earnings growth, but shares traded up over 5% on July 23.

Why it matters: Honeywell Technologies produced a solid quarter even with bifurcated segment-level results. Orders grew 16% year over year, signaling sales growth acceleration in the near term. Strong data center and hospitality construction drove 9% building automation organic growth year over year, while new LNG construction and a weak catalyst aftermarket amounted to flat process automation segment growth. Notably, process automation's margin contracted 180 basis points from last year due to declining catalyst sales, which tend to fetch higher margins.

The bottom line: We raise our fair value estimate for wide-moat Honeywell to $186 per share, from $164, to reflect more bullish near-term revenue growth. We believe shares are considerably overvalued. At Honeywell's current price, the market is paying around 30 times forward adjusted earnings. The firm needs to compound its EPS in the double digits far beyond management's current three-year target to justify this valuation. After the aerospace spinoff, we're unsure that the firm is sufficiently simplified to deserve a positive re-rating. The RemainCo still owns multiple cyclical businesses with relatively unpredictable, idiosyncratic demand.

Between the lines: Honeywell closed on the acquisition of Johnson Matthey Catalyst Technologies on July 17. We like the purchase from both price and strategic standpoints. The purchase was for £1.325 billion, down from £1.800 billion that was agreed upon in May 2025, representing a 26% price cut secured through a closing delay, which we view as a competent capital allocation outcome. Catalysts are specified into the multidecade operation of a plant, and adding Johnson Matthey's catalyst portfolio widens Honeywell's installed-base lock-in.

Our $186 fair value estimate equates to around 23 times our 2026 adjusted earnings per share estimate.

Honeywell completed the spinoff of its aerospace business on June 29. Although we did not see much upside based on a sum-of-the-parts analysis, two stand-alone entities with their own boards and executive teams could improve capital allocation decision-making and kick-start growth.

We believe Honeywell Technologies can deliver low-single-digit organic top-line growth over the next five years by taking advantage of secular growth opportunities such as automation in the commercial building, manufacturing, and warehousing industries amid wage inflation, worker safety concerns, and the need to drive better throughput. Near-term, we expect that the continual reshoring of supply chains and a construction renaissance in the US could spur demand for all of Honeywell’s products.

In the coming years, we expect a modest expansion of Honeywell Technologies’ operating margin from a more favorable revenue mix and operational efficiency gains through simplifying its supply chain and digital footprint. We model the firm to generate a low-20s segment (non-GAAP) profit margin and a high-single-digit EPS compound annual growth rate over our explicit forecast.

With an estimated cost of capital around 8.5%, we expect Honeywell Technologies to generate long-term returns on invested capital, inclusive of goodwill, in the low teens, driven by its strong competitive advantages. We think the firm can achieve a long-term EBI growth rate in the midsingle digits. Along with capturing long-term secular trends, Honeywell is positioned to bolster its per-share earnings growth with share buybacks, margin improvements, and strategic acquisitions.

We assign Honeywell Technologies a wide Morningstar economic moat rating underpinned by intangible assets and switching costs. We estimate that Honeywell generates returns on invested capital, including goodwill, averaging in the low teens. Excluding goodwill reveals returns in the high 20s. We estimate that the company outearned its cost of capital during major shock years, including 2009 and 2020, even on a goodwill-inclusive basis. As such, we believe it is more likely than not that Honeywell can generate excess returns 20 years into the future.

Honeywell has a rich heritage, with 140 years of operation to develop the quality underpinning its name. Customers value Honeywell’s time-tested reputation, as failure of many of the systems in which Honeywell’s products are used (for example, building fire detection systems, petrochemical refineries, and semiconductor manufacturing plants) can result in catastrophes such as human death. The company’s technical know-how, brands, and lengthy customer relationships therefore hold weight in the industries in which it operates, giving Honeywell pricing power and acting as intangible assets that widen its moat.

We believe Honeywell’s building automation segment merits a wide moat derived from intangible assets and switching costs. Within BA, Honeywell boasts one of the largest global installed bases of fire, security, and HVAC equipment and has formed a reputation from over a century of operation along with a catalog of brands on which contractors are well trained. Contractors generally reach for proven brands that minimize the risk of malfunction in building systems. Furthermore, the cost of Honeywell’s building products tends to be dwarfed by labor and engineering costs while remaining mission-critical to the building’s operations and specified into design blueprints. The end customer therefore tends to focus less on the price of Honeywell’s building products, affording significant pricing power. We think this shows up quantitatively; BA boasts the firm’s highest margins, rivaling those of other wide-moat building product manufacturers such as Allegion and Assa Abloy.

It commonly costs customers more to switch suppliers of such mission-critical components than the actual savings realized from switching, due to operational downtime, system redesign, regulatory approvals, and the potential for system failure. BA has moved away from single-product sales to an ecosystem of software-enabled equipment, ratcheting up switching costs even further. Honeywell’s building products integrate functions with high risks of failure, like security and fire monitoring, with other critical business operations, like energy usage and climate control. These solutions have the added benefit of alerting customers in the event of occurrences like power outages or maintenance needs, which provide the segment with additional recurring revenue (for example, alarm monitoring or service dispatch in the event of an alarm). BA also offers outsourced project design and system integration for contractors and engineers with which it can pull through its own products. Although the replacement cycle for BA’s building products can range from five to more than 15 years, we think the majority of BA’s installed equipment generally has weak aftermarket potential, thus limiting the segment’s revenue visibility.

We think Honeywell’s process automation and technology segment carves a wide moat through intangible assets thanks to regulatory barriers and a deep, successful pipeline of research and development, as well as switching costs derived from being specified into customer operations. PA&T has a massive installed base of catalysts, adsorbents, and refinery equipment in the oil and gas industry along with automation equipment in the mining, metals, pulp and paper, and food and beverage industries. Process manufacturing plants tend to operate 24/7; switching out equipment requires plant redesign and downtime that can decrease throughput. Our best quantitative evidence of switching costs from the segment’s installed base, given its exposure to the oil and gas industry, is its ability to turn a profit even during large drops in the price of oil. During 2015-16, segment profits grew 14% even as the price of oil dropped 55%, all while PA&T maintained higher margins than peers. We estimate that PA&T generates over 50% of sales from high-margin recurring aftermarket services, replacement parts, and consumables. We expect the use of third-party replacement parts and technicians to decline as proprietary software is overlaid onto Honeywell’s existing hardware products and more components interact with one another.

We think Honeywell Technologies’ industrial automation segment has a narrow economic moat. Although IA contains a significant installed base of equipment that can’t easily be ripped out of customer operations, the segment is cyclical and displays weaker aftermarket potential, thus limiting returns. Quantitatively, IA generates lower margins and returns on invested capital than Honeywell’s other segments. Optimistically, we expect IA’s returns to improve as it transforms its installed equipment by overlaying it with software and data analytics on the heels of energy efficiency initiatives and mandates. For example, Honeywell’s acquisition of Elster in 2015 gave it access to 200 million gas utility metering modules in portions of the US and Europe, over which the company is working to embed smart metering capabilities with greater recurring revenue potential. IA sells a slew of other high-risk safety equipment that possesses considerable intangible assets, such as brand recognition and a reputation for reliability.

The shift away from siloed, transactional sales toward connected systems with software overlays should continue to lower the cyclicality of operating performance and raise switching costs.

Honeywell Technologies is making several organic bets in mission-critical end markets that could yield very strong internal rates of return over the long term, including in liquefied natural gas and building automation.

Recent divestitures and spinoffs have created a more focused automation specialist, which could positively affect decision-making at the top managerial level.

The spun-off aerospace business segment displayed strong countercyclical characteristics. Honeywell Technologies’ remaining portfolio risks outsize operating income declines in economic downturns.

Honeywell Technologies still owns too many disparate businesses with inharmonious operating results that risk underperformance.

Expensive future acquisitions risk adding to the massive amount of goodwill already sitting on the balance sheet.