Honeywell ‘s new partnership with Canadian planemaker Bombardier makes it clear that the American industrial conglomerate’s aerospace business should be operating on its own, Jim Cramer said Tuesday. The news Club holding Honeywell and Bombardier announced a research-and-development collaboration on aircraft technology, including cockpit systems, engines, and satellite communications. Quebec-based Bombardier is known for its business jets sold under the Challenger and Global brands. In a press release Monday night, Honeywell — headquartered in Charlotte, North Carolina — estimated the partnership could provide up to $17 billion in revenue over its unspecified lifetime. The two companies also settled a nearly decade-old lawsuit over engine prices. The final piece of the disclosure is causing some frustration and could explain why Honeywell’s stock is down more than 2% on Tuesday: The company lowered its full-year guidance on several important financial metrics, such as sales and adjusted earnings per share. Honeywell said the adjustments were necessary due to “the required investments associated with this [Bombardier] agreement.” Honeywell now expects revenue in 2024 of between $38.2 billion to $38.4 billion — a reduction of $400 million on both the high-end and the low-end of the range. Adjusted EPS is projected between $9.68 and $9.78, compared with a range of $10.15 to $10.25 previously. Free cash flow guidance took a $500 million hit — now expected to be $4.75 billion at the midpoint. Honeywell sees segment margin — a measure of combined profitability for its operating units — in the range of 22.6% to 22.7%. Previously, the guidance stood at 23.4% to 23.5%. Big picture Honeywell’s aerospace business is the crown jewel of its portfolio — a fact that is very much on display with the long-term Bombardier agreement. It is precisely why activist investor group Elliott Management has amassed a more-than-$5 billion stake in the company and begun pushing executives to break up the conglomerate. In announcing its position last month, Elliott said it wants Honeywell to turn its aerospace and automation businesses into standalone entities, arguing that would help the company “realize its full potential.” Honeywell has been mired in a period of prolonged stock price underperformance. Cramer has also been urging CEO Vimal Kapur to streamline the company’s wide-ranging business portfolio. Kapur took over as CEO in June 2023. Shares of Honeywell have returned 42%, including dividends, over the past five years. The S & P 500 has more than doubled over that stretch, while a popular exchange-traded fund tracking the industrial sector has posted a total return of 90%. HON YTD mountain Honeywell’s year-to-date stock performance. To be sure, Kapur has taken some steps to refocus Honeywell’s operations around what he calls the three “mega-trends” of automation, the future of aviation, and the energy transition. Honeywell currently has four operating segments: aerospace technologies, industrial automation, building automation, and energy and sustainability solutions (ESS). In October, Honeywell said it would spin off its advanced materials business , housed in the ESS segment, into a publicly traded firm. The advanced materials unit makes pharmaceutical packaging products and bullet-resistant resins used in body armor. More recently, Honeywell said it’s selling its business that makes masks and other personal protective equipment to New York-based Protective Industrial Products for $1.3 billion in cash . That unit is part of Honeywell’s industrial automation segment. A sale of the PPE business, announced on Nov. 22, had reportedly been under consideration well before Elliott disclosed its stake. Honeywell has also made purchases to bolster priority areas, including the acquisitions of Carrier Global ‘s residential and commercial security systems unit and Air Products ‘ liquefied natural gas process technology and equipment business . These acquisitions fit under the automation and energy themes. In general, proponents of corporate breakups argue that they can make companies more nimble and allow management teams to focus their energies and investment efforts on fewer, more impactful areas. In recent years, a number of industrial firms have found success breaking themselves up — most notably General Electric, which became focused solely on aerospace by separating its health care and energy businesses into separate publicly traded companies. The Club owns shares in one of those spin-offs, GE Healthcare . The energy unit is known as GE Vernova . Former General Electric now trades as GE Aerospace . Bottom line Honeywell’s poorly explained partnership with Bombardier is actually a long-term positive for the Club holding — something Jim and Director of Club Portfolio Analysis Jeff Marks made clear during Tuesday’s Morning Meeting for members. Considering the way Honeywell detailed its guidance cut in conjunction with the deal, though, it’s understandable that some investors may be confused about its merits. “In order to get one of these giant contracts, you have to have some upfront costs and then it’s just bountiful,” Jim said. “They made it seem like, ‘Look, our numbers are bad away from this.’ No. This [guidance revision] had to do with the actual deal.” “I think it’s Exhibit A for why Elliott is right,” Jim said. He argued that if Honeywell was hypothetically a pure-play aerospace company at the time of striking this Bombardier deal, it would be much easier to tout its benefits to investors. It’s a reminder that communicating financial expectations and the rationale for decisions to Wall Street is part of executives’ jobs. “But these guys [at Honeywell] don’t know how to tell a story,” Jim said. We’re hoping that Kapur can do a better job discussing the Bombardier partnership on Thursday when he is scheduled to appear at Goldman Sachs’ industrials conference in New York City. “We’re not going to get rid of the company because it’s actually good. But I am beginning to believe that Elliott will press and press and press,” Jim said. “The people who run Honeywell should remember they work for shareholders.” (Jim Cramer’s Charitable Trust is long HON. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Bombardier Challenger Cl-600 taking-off with undercarriage retracting.
Aviation-images.com | Universal Images Group | Getty Images
Honeywell‘s new partnership with Canadian planemaker Bombardier makes it clear that the American industrial conglomerate’s aerospace business should be operating on its own, Jim Cramer said Tuesday.