Immelt Who?

Honeywell's Adamczyk Is Right for These Industrial Times

A technocrat is poised to claim the industrial crown.
Photographer: Christopher Goodney/Bloomberg
At Closing, February 16th
15.05 USD

There's an opening for a new king (or queen) among industrial leaders, and Honeywell International Inc.'s Darius Adamczyk is as good a candidate as any to claim the title.

The titans of American manufacturing -- ushered in during a wave of CEO appointments in the early 2000s -- are coming to the end of long tenures. Some have seen their stars fade, such as General Electric Co.'s former CEO Jeff Immelt and Emerson Electric Co.'s Dave Farr, whose attempt at rewriting his legacy with a Rockwell Automation Inc. takeover was foiled this year. Dave Cote, Adamczyk's predecessor at Honeywell and still the company's chairman, is among the lucky few that will get to retire on a high note. The next generation has to pick up where these leaders left off, for better or for worse. 

Top of the Heap

The early 2000s brought in a new crop of industrial CEOs. Of that class, Roper and Danaher have been the clear standouts, but Honeywell's performance is nothing to sneeze at

Source: Bloomberg

Adamczyk started as Honeywell's CEO in March, taking over a $117 billion company that makes everything from plane parts to warehouse-automation equipment. He's doesn't sport the kind of larger-than-life personality that marked many of the industrial CEOs who came before him, particularly Immelt and Farr. An engineer by training, Adamczyk was described by Stifel Financial Corp.’s Rob McCarthy as "an informed, dispassionate, cerebral technocrat." That was meant as a compliment.

And while many of Adamczyk's peers were lifers at the industrial giants they eventually got to run, he only joined Honeywell in 2008 when it bought the company he was running at the time, Metrologic. At 51, Adamczyk is no upstart, but that age actually ranks him among the youngest industrial leaders on the S&P 500.

Ramped Up

Honeywell's growth hasn't typically stood out, but that's starting to change

Source: Bloomberg Intelligence

Note: 2017 data reflects companies' most recent guidance, except for Emerson which has already completed its fiscal year. When ranges were given, the midpoint is shown. 3M said it was tracking toward the high end of its 4 percent to 5 percent range. GE didn't give specific organic revenue guidance after it dramatically cut its EPS outlook for 2017. RBC analyst Deane Dray estimated in October that the company would have 2017 organic growth of just 1.3 percent.

Adamczyk's background and nature make him an ideal industrial CEO at a time when shareholders have become disillusioned with the conglomerate structures of old. All parts of the business need to be firing on all cylinders, with the laggards marked for divestiture and a clear growth strategy for what remains. 

At Honeywell, Adamczyk's challenge is to make a good company even better, a task that can sometimes be more difficult than helping a struggling one find its footing. He has some ideas, particularly as it relates to boosting Honeywell's at-times anemic growth through acquisitions and software investments. The trick is having the latitude to be able to implement them. 

Already, Adamczyk has had to grapple with an activist investor. He embraced Third Point's starting principle that Honeywell could be simplified. The hedge fund wanted Honeywell to spin off its aerospace unit; Adamczyk instead will break off the company's turbochargers and consumer-facing home technologies businesses.

Mind the Gap

Honeywell is parting with a meaningful chunk of the company. Streamlining is the right move, but eventually it will have to rebuild that revenue and earnings power with deals.

Source: Bloomberg

Adamczyk's divestiture of those ill-fitting businesses makes sense and allows Honeywell to get rid of legacy liabilities at the same time. That said, it's parting with nearly 20 percent of its revenue and analysts have been estimating EPS dilution in 2018 and 2019, even after accounting for share buybacks. Honeywell is aiming to eliminate close to 100 percent of stranded costs within three years, which will help offset the dilution. The next step is to rebuild with acquisitions. It's easier said than done. Honeywell spent just $100 million on M&A in 2017, per a presentation this month, despite repeatedly saying it's on the hunt for deals.

One problem is skyrocketing valuations. While some peers have succumbed and sought takeovers at considerable multiples, Adamczyk appears to actually mean it when he says he'll stay disciplined. Kudos, honestly. The other challenge is finding assets that cater to Adamczyk's goal of aggressively expanding Honeywell's software capabilities, while still offering enough in the way of tangible growth prospects to win over investors.

Spending Money

Honeywell has said it has $14 billion of cash available to deploy next year. Passage of new tax legislation will allow it to bring back overseas cash and give more attention to U.S. targets.

Source: Honeywell presentation

A good template is Honeywell's $1.5 billion purchase of warehouse-automation company Intelligrated last year. Garnering new customers for that business is less profitable work than some of Honeywell's legacy operations, and that was part of the reason it recently had to make an out-of-character reduction in its fourth-quarter 2017 margin goal. Not too long ago, that would have freaked out investors, but margin hits from the Intelligrated business are being overshadowed in a good way by double-digit sales growth.

Warehouse management is also enough of a niche that Honeywell can be a clear leader. It recently acquired a stake in supply-chain software maker Flux Information Technology as well. At an interview at Bloomberg's New York headquarters in November, Adamczyk was quick to make clear Honeywell is focusing on market-specific technology, rather than a ubiquitous software platform. In other words, it's not going to make the same mistakes GE did. A smarter approach to software is one benefit of having a guy with two computer engineering degrees as your CEO.

Honeywell investors should give Adamczyk the benefit of a little time to find the next Intelligrated. Being the exact opposite of GE as far as earnings stability and cash generation offers a helpful, if temporary, shield. If the GE debacle has taught us anything, it's that personality and promises only work for so long. The key is execution, but Adamczyk has all the right ingredients to make himself a CEO to be remembered.

(A previous version of this story (in the eighth paragraph) erroneously quantified the stranded costs from the divestitures at as much as $1.2 billion. Those are separation costs and a figure hasn't yet been given for stranded costs.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Brooke Sutherland in New York at

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    Beth Williams at

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