EUR 850.00 For Business Accounts Only

Morningstar | HON Updated Forecasts and Estimates from 12 Sep 2018

In a move that was well-telegraphed for nearly a year, wide-moat-rated Honeywell’s board declared a pro rata spin-off dividend of Garrett Motion’s shares on Sept. 5, 2018, which was previously booked under transportation systems (automotive turbo engines) in Honeywell’s aerospace segment. The special dividend is effective Oct. 1, 2018. In 2017, Garrett contributed nearly $3.1 billion in net revenue ($623 million EBITDA) relative to total Honeywell’s $40.5 billion in net revenue. For the first half of 2018, Garrett has contributed nearly $1.8 billion in net revenue compared with $21.3 billion in net revenue for total Honeywell, or about 8.4% of first-half 2018 net revenue. As part of the spin, each Honeywell shareholder before the Sept. 18, 2018, record date will receive a distribution of one share of Garrett for every 10 shares of Honeywell stock held. We are leaving our $168 fair value estimate intact since we previously modeled the fundamental effects of the spin. We also leave our wide moat rating intact.

We reiterate our prior views detailed in the stewardship section of our report, namely, we believe CEO Darius Adamczyk rationally responded to outside pressure from activist investors when he demurred from spinning off the entirety of aerospace, which we consider the firm’s moatiest segment. Even so, we think he made the right call to spin off two businesses (the other being Resideo, Honeywell’s homes business) that were less prioritized for reinvestment, but still have attractive growth prospects and moat sources. Garrett, moreover, never really fit in with Honeywell’s aerospace segment, where it was tucked in after Honeywell sold off a brakes business to Federal Model for $155 million.

After a presentation given on Sept. 6, 2018, we think Garrett is most like narrow-moat-rated BorgWarner in our coverage. Our initial take is that Garrett benefits from similar moat sources, including primarily high customer switching costs from highly integrated customer ties, as well as intangible assets and a scale-based cost advantage. Given its integration into a customer’s supply chain, often as a sole supplier of a component or system, Garrett’s vehicle powertrain programs benefit from long-term supply agreements of up to 20 years, providing the firm with a large installed base and enviable recurring revenue. Customer relationships with certain OEMs like Volkswagen and Ford, moreover, span 30 to 40 years.

Garrett also benefits from technology leadership. One area that piques our initial interest is its foray into automotive cybersecurity. As a separate entity, we think this is an area ripe for reinvestment, given advantages that smart analytics and predictive maintenance can provide. We believe demand should only rise as the availability of autonomous vehicles rises and vehicles are increasingly connected.