Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Meet Darius Adamczyk's Honeywell: growth-hungry and aggressive.

Adamczyk still has about a month to go before he officially takes control of the $96 billion industrial conglomerate, but he was clearly running the show at Honeywell International Inc.'s investor day on Wednesday. Outgoing CEO Dave Cote spent much of his opening remarks talking about why Adamczyk deserved to be his successor: namely, he has expertise in software and is in a position to ramp up sales. Cote is better known for getting Honeywell back on course following General Electric Co.'s failed 2000 takeover bid and driving consistent EPS and margin improvements than he is for revenue gains, especially during the past five years of middling organic growth. 

Best In Class
Under Cote's tenure, Honeywell has driven steady margin improvement
Source: Honeywell Investor Day Presentation
2017 data reflects the midpoint of Honeywell's 19% to 19.4% guidance. The company said this week that 2018 margins should be toward the high end of its targeted 18.5% to 20% range.

Adamczyk's sales pitch was an attempt to balance those two worlds. For investors who like Honeywell because of its reputation for profitability gains, he promised the company would best its peers in EPS growth and deliver 30 to 50 basis points of margin expansion per year over the "long term." Notably, that's less than the 45 to 75 basis points implied by the five-year plan the company rolled out in 2014.

A number of analysts (for now) attribute that drop to playing things conservatively, but expect that to be a watch item as Adamczyk tries to accelerate organic sales toward low-to-mid single-digit growth in the long term. Because while the word "margin" appeared 83 times in Honeywell's prepared slides, "software" shows up 99 times and "growth" is there more than 300 times. The other big one was Honeywell's very un-Cote like "aggressive" plans for M&A. 

Under Construction
Honeywell's organic growth has underwhelmed in the past few years, even as Cote continued to improve margins and lift profits
Source: Bloomberg Intelligence
Including the impact of the Alstom acquisition, GE's organic growth was 1 percent in 2016

To recharge the company's revenue, which declined 1 percent last year on an organic basis, Adamczyk wants to invest in software capabilities and build up the company's sales force (without impairing margins of course). He plans to inject an "entrepreneurial mindset" into the more than 100-year-old company by pushing each unit to come up with breakthrough growth ideas that can exist as separate start-up-like entities. The company also touted its Sentience platform, which can be used to improve efficiency throughout its businesses and, because it's open architecture, can also support third party products.

Hmm … where have I heard all of this before? Ah yes, at GE presentations over the past few years. To be fair, Honeywell has had connected industrial products and software offerings for a while so it's not a total follower and arguably it's in a better position than many non-GE peers to capitalize on this digital shift. But it might have wanted to come up with a more original tagline. Honeywell is now billing itself as a "software-industrial" company -- not to be confused with GE, the "digital-industrial" company.

Getting Aggressive
Absent tax reform, Honeywell's offshore cash bounty suggests it will focus on international targets
Source: Honeywell Investor Day Presentation

Moving on to M&A. Adamczyk highlighted $18 billion in deal and buyback capacity through 2019 in addition to a $6 billion placeholder for dividend payments. Where that money gets spent depends on whether tax reform in the U.S. creates an opportunity for Honeywell to bring home the $5.5 billion in cash it has stockpiled overseas.

What might it buy? The odds of another run at a $100 billion-plus bid for United Technologies Corp. are slim, but we could see deals worth several billions of dollars for software-oriented targets -- perhaps something similar to the $1.5 billion purchase of warehouse automation company Intelligrated last year, one of the bigger public price tags paid under Cote.

It's fair to ask whether that's the type of acquisition investors want, as Stifel Financial Corp. analyst Robert McCarthy did. The Intelligrated business is growing quickly,  but the acquisition was one reason Honeywell had to roll back its guidance in the third quarter. Flow-control equipment companies Flowserve Corp.  and Crane Co., aircraft motion-control systems maker Moog Inc. and wheels-and-brakes producer Meggitt Plc are among more traditional industrial options that would round out Honeywell business units and offer cost-cutting potential. HVAC company Lennox International Inc. could be another possibility.

Adamczyk has the benefit of testing out his growth strategies on an already well-run operation at a time when the industrial outlook is brightening. But to push the stock price above its now record high, he'll have to walk a careful line between the old and new Honeywell.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net