Honeywell's Strategic Partnership with Bombardier: A Long-Term Growth Catalyst

Honeywell (HON, Financial) is focusing on the future of aviation as part of its new business strategy. The company has announced a significant partnership with Bombardier (BDRBF, Financial) to develop advanced technology for existing and future Bombardier jets. This collaboration also includes certifying Honeywell's JetWave X high-speed in-flight connectivity product.

• The partnership is projected to be worth $17 billion over its lifespan, offering lucrative potential for Honeywell. However, initial investments in research and development will impact financials, affecting sales, margins, EPS, and free cash flow.
  • For Q4, Honeywell anticipates a $400 million reduction in revenue, with adjusted EPS decreasing by $0.47. The company also revised its FY24 free cash flow guidance down by $500 million to $4.6-$4.9 billion.
• This guidance cut follows Honeywell's mixed FY24 outlook in its Q3 earnings report on October 24. Despite raising its EPS forecast, the company lowered its sales projection due to slower recovery in industrial automation and more cautious expectations for aerospace and energy markets in Q4.
• Honeywell's recent challenges and underperformance, with shares up just 7% year-to-date, have attracted the attention of Elliott Investment Management. The activist firm has acquired a $5 billion stake in Honeywell and is urging the company to separate its Aerospace and Automation businesses, similar to General Electric's (GE, Financial) successful split.
  • Since GE separated its Aerospace and Defense from Energy and Power on April 2, 2024, GE Aerospace (GE) shares have risen 32%, and GE Vernova (GEV, Financial) has surged 135%. While a similar outcome for Honeywell isn't guaranteed, a split could be positively received by the market.
• Honeywell is actively simplifying its operations. On November 22, it announced the sale of its Personal Protective Equipment (PPE) business for $1.325 billion. Earlier, on October 8, Honeywell revealed plans to spin off its Advanced Materials business into a publicly traded company by 2025 or early 2026. This unit, part of the Energy and Sustainability Solutions segment, produces additives and polymers used in various products like plastics, paints, and asphalt.

The key takeaway is that the Bombardier partnership offers significant long-term growth potential, but another downward revision to Honeywell's FY24 outlook casts a shadow over the deal's positive aspects.