Buy Honeywell Stock Before The Split?

This industrial giant is about to become two separate companies, forcing investors to weigh a large backlog against current operational headwinds and a premium price.

Honeywell International (HON) is a company in the middle of a metamorphosis. While its stock has returned just 0.3% over the last three months, a period where the S&P 500 climbed 11.9%, the industrial conglomerate has been orchestrating its most significant strategic shift in years. On June 29, the company plans to spin off its aerospace division, a move management calls the “final step in our transformation.” The result will be two more focused public companies: one centered on aerospace and defense, the other on industrial automation. For an investor today, this raises a practical question: with the stock trading about 10% below its 52-week high, are you buying into a streamlined future, or are you paying for a complex transition facing very real, present-day challenges?

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What The Stock Costs Today

Before you get a piece of that future, you have to pay today’s price, and for Honeywell, that means paying a premium. The stock trades at a price-to-earnings ratio of 35.3, well above the S&P 500’s 24.1. Its price-to-sales ratio of 3.9 also sits higher than the market’s 3.2. The market is essentially looking past the company’s current structure and performance, and pricing the stock for the potential value to be unlocked by the split. For this premium to make sense, you have to believe that creating two more specialized companies will lead to better growth and profitability than the combined entity has recently shown. You are paying up for the strategic story.

What You Get For It

What you get is a business with a formidable backlog but uneven current performance. While the company’s total backlog now stands at over $38 billion, its recent growth and profitability metrics screen below the broader market. Revenue has grown at just a 0.9% average annual rate over the last three years, compared to 5.9% for the S&P 500. Its 17.2% operating margin also trails the market’s 18.4%. The engine has several moving parts. The Building Automation segment has been a consistent bright spot, with sales up 8% organically in the most recent quarter. In contrast, the Process Automation and Technology business saw sales fall 6% organically, hit by the conflict in the Middle East.

The large Aerospace division, soon to be its own company, grew sales just 3% as it wrestled with what management called “temporary mechanical supply chain constraints.” The bull case rests on the idea that demand is not the problem. Management notes that aerospace demand is “exceptionally strong,” and the company has secured over $2 billion in new project wins for its process automation technologies in areas like LNG and sustainable aviation fuel over the past three quarters.

Can It Fund Its Plans

Honeywell appears well-equipped to finance its transformation. While its debt load of 25.4% of its market value is slightly higher than the market average of 21.1%, the company holds a significant cash position, making up 16.7% of its total assets versus just 6.7% for the market. It is generating cash, though the adjusted free cash flow in the last quarter was $56 million, down from $191 million a year ago due to collection timing and inventory issues. The company is also actively returning capital to shareholders, with $1.8 billion in share repurchases and dividends last quarter. Critically, it successfully raised $20 billion in financing for the Aerospace spin, positioning both future companies on a solid financial footing from the start.

How It Holds Up When Markets Fall

An investment in Honeywell has historically required a strong stomach during market-wide downturns. A look back at the last three major shocks reveals a consistent pattern. During the 2022 inflation shock, the stock fell 29% versus a 25% drop for the S&P 500. In the 2020 pandemic, it fell 43% against the market’s 34% decline. And in the 2008 financial crisis, it dropped 63%, more than the S&P 500’s 57% fall. In each case, it also took longer than the index to recover its prior peak. This history suggests the stock carries higher-than-average risk in a broad sell-off. Today, the options market seems to be pricing in the potential for bigger swings, with implied volatility in the 94th percentile of its one-year range.

Putting It Together

So, how do you weigh the decision on Honeywell stock right now? On one hand, you have a company on the verge of a major strategic simplification, armed with a large $38 billion backlog that provides clear visibility into future work. Management is confident it can navigate current headwinds and deliver accelerating growth in the second half of the year. The planned split could unlock value by allowing each business to pursue its own distinct strategy and capital allocation priorities.

On the other hand, you are paying a premium valuation for a business whose recent growth and margins have lagged the market. The first quarter was hampered by tangible macro headwinds, from supply chain snags in its key aerospace division to geopolitical conflict impacting its energy-focused business. And history shows the stock has been a rougher ride than the overall market when things go wrong. The entire investment case hinges on management’s ability to execute a smooth separation while delivering on its promised second-half recovery. The key thing to watch will be whether that backlog begins converting to sales at the pace management forecasts, proving the current issues were indeed temporary.

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