When Honeywell International (NYSE:HON) told shareholders in October of last year it would be spinning off a handful of its division in an effort to become a more focused (and hopefully more profitable) organization, owners of HON stock were curious, though not necessarily excited. Since the conglomerate doesn’t report quarterly numbers in vivid detail, shareholders had little idea of how any split would change the parent company’s — and their — bottom line.
The picture became considerably sharper on Thursday though. That’s when Honeywell submitted form-10 registration statements for the impending spinoffs that have been in the works for nearly a year now. These forms serve up the fiscal results the two arms have been achieving of late.
All in all, not bad. The two companies on the verge of becoming standalone entities may actually be better — even if smaller — opportunities than HON stock itself is.
Healthy Enough
Form 10 (not to be confused with a publicly-traded company’s annual financial report called a 10-K) is the paperwork required by the SEC to spin off part of an organization into new publicly-traded entities. It’s most akin to a prospectus filed shortly before initial public offerings.
Unlike an IPO though, which can be bought or skipped by investors, a spinoff of a separately-traded organization doesn’t come with a choice; HON stock holders will be receiving shares of yet-to-trade companies called Garrett and Resideo. Shares of the former will be passed along to Honeywell shareholders before the end of the third quarter, while the latter’s stock will be delivered to Honeywell investors — assuming they still own HON stock on the date of record — before the end of the year.
The good news is, both of these outfits sport compelling numbers.
Garrett mostly makes turbochargers for performance vehicles. Despite a revenue-growth lull in 2015 and 2016, the division has remained profitable. Halfway through the current year, the top line of nearly $1.8 billion is tracking a bit higher than usual, and Garrett has banked net income of $208 million and adjusted EBITDA of $344 million. Those are margins of, respectively, 11.6% and 19.2%.
Resideo, which mostly consists of Honeywell’s Homes business and ADI global distribution (thermostats, security cameras, fire alarms, etc.), is the more established of the two and boasts more operating history. It’s not just profitable, but firmly so, having turned six months’ worth of revenue of $2.36 billion into operating income of $247 million. Non-GAAP adjusted EBITDA for the same stretch rolled in at $314 million, translating into net profit margins of 13%.
Also note that revenue has been building for a few years.
One could certainly do worse.
For perspective, Honeywell as a whole reporting operating income margins of 16.3% last quarter, up a bit from year-ago levels, and in-line with first quarter numbers.
Resideo and Garrett are neither a drag on the parent company’s results, nor of white-hot benefit. On a purely mathematical basis, the spinoffs will create minimal impact.
There’s more to the matter than mere math though.
Upside to HON Stock Owners
There was a point in time not that long ago when conglomerates thrived by virtue of their diversity. General Electric (NYSE:GE) and United Technologies (NYSE:UTX) come to mind. United Technologies — yes, the defense contractor — also owns Otis Elevators and did well with the unlikely arm for years. GE was in a great number of ventures. And each was able to help to fuel the others.
The advent of the internet has facilitated efficiency in all facets of business though, and sped commerce up to a pace unthinkable in the 90’s. That paradigm shift has made maintaining conglomerates just for the sake of maintaining conglomerates, however, a liability rather than a benefit. Smaller and nimbler is better. Focus is more potent than raw power. That’s why United Tech is mulling spinoffs, and why General Electric has already shed several units.
And, that’s why current and even would-be owners of HON stock may want to cheer the upcoming spinoffs that have thus far been viewed though a lens of “meh… whatever.” By simplifying and streamlining each arm, the bottom lines for each division have a good shot at beefing up already-solid results.
At the very least, the spinoff stocks are at least worth hanging onto and being given a fair shot at earning a place in investors’ portfolios.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
