Honeywell Isn't Going to Let a Little Breakup Ruin Its Growth Plans

Investors are usually happy when a company can pull off one big goal and do it well. So Wall Street was almost certainly expecting Honeywell (NASDAQ:HON) to focus all of its attention in the immediate future on what amounts to a massive corporate restructuring. Then management threw a wrench into the works by announcing plans for a $2.16 billion acquisition. What is going on?

Honeywell is feeling the zeitgeist

Wall Street tends to go through periods when companies buying up other companies to create ever-bigger conglomerates is seen as the natural path to success. Then, the script flips and investors start pushing for massive companies to spin units off and "unlock value," under the theory that the various business units would perform better as focused, standalone entities.

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Right now, it seems like there's a general desire among investors for companies to break themselves apart. The biggest recent story in this vein was probably General Electric, which is General Electric no longer. It is now GE Aerospace (NYSE:GE), GE Vernova (NYSE:GEV), and GE Healthcare (NASDAQ:GEHC).

But that industrial giant was not the only iconic company to slim down recently. Johnson & Johnson (NYSE:JNJ), for example, spun off its consumer healthcare business as Kenvue (NYSE:KVUE), leaving the parent company able to focus all of its attention on its drug and medical device businesses.

Honeywell, a diversified industrial conglomerate, started down this same path by announcing plans to spin off its advanced materials business into a standalone entity. Then it went a step further when it announced, just before releasing its fourth-quarter 2024 earnings last month, that it was actually going to break up into three businesses: advanced materials, Honeywell Automation, and Honeywell Aerospace.

It is complicated to spin off one business unit. It is even more complicated to break a massive public company up into three new ones. General Electric's path to do the same thing was a multiyear affair. Often companies in the middle of transformative actions like this end up in something of a stasis mode on other fronts, given all of the work that goes into managing a breakup. Any thoughts of acquisitions usually get put on the back burner since they are kind of antithetical to the idea of breaking up and slimming down.

Honeywell isn't giving up on growth through acquisitions

Honeywell is not content to do things the easy way and simply go from point A (conglomerate) to point B (three smaller companies). It has announced that it will buy Sundyne from a private equity firm for $2.16 billion. The deal is expected to close in the second quarter. Sundyne makes and provides aftermarket support for highly engineered pumps and gas compressors.

While the acquisition should be a good fit for Honeywell, the most important aspect of the deal is probably management's statement that it's doing this deal while still moving forward full speed on its break up and other streamlining efforts. As for the other streamlining efforts, Honeywell is expected to complete the sale of its personal protective equipment business in the first half of 2025. The conglomerate has a lot on its plate.

There's good news and bad news here. Unlike GE, which was essentially forced to break up because of the weakened condition of its business following the Great Recession, Honeywell is breaking up while it is in a position of strength. Its sales rose 5% in 2024, and adjusted earnings grew by 4% -- not massive growth, but a pretty solid performance for a $130 billion market cap company. Further, its fourth-quarter revenue and adjusted earnings exceeded its guidance, so the year ended on a particularly strong note. While the planned breakup is big news, management clearly isn't easing back on the accelerator.

The bad news is that management's plan to keep operating in some ways as if Honeywell wasn't splitting apart increases uncertainty. It is purposefully making a complex situation even more complex. If it can execute everything well, that won't be a problem, but the risk of missteps increases with every additional corporate transaction.

Honeywell is a special situations stock right now

If all Honeywell was doing was selling off some of its smaller units while simultaneously making bolt-on acquisitions to bolster the core company, there would be no problems. But its actual strategy has made it something of a special situations stock. There's probably no reason to sell Honeywell shares now if you already own them (unless you hate the idea of this breakup, of course), but buying the stock today is probably something that only more aggressive investors should do, given the number of balls management is juggling.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends GE HealthCare Technologies and Kenvue. The Motley Fool recommends GE Aerospace and Johnson & Johnson and recommends the following options: long January 2026 $13 calls on Kenvue. The Motley Fool has a disclosure policy.