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Morningstar | Productivity Product Slowdown Doesn't Change Our Positive Honeywell Thesis

In our view, Honeywell remains one of the best-positioned, multi-industrials for long-term growth based on a confluence of three factors--culture, process, and portfolio. While culture is hard to define, we submit it’s essential to Honeywell’s continued success. Common characteristics in its workforce include an ability to demonstrate independent and curious intellectual thought, as well as results-driven entrepreneurialism. A rigorous process is clear at all levels of the organization. Honeywell’s operating system is modeled after the Toyota production system and employs a cross-functional framework emphasizing lean operations, customer-focused solutions, and speed of product development down to the plant level. Even though Honeywell implemented its operating system years ago, we still see an opportunity for further operating margin uplift and model a near 3-point improvement over the next four years. Importantly, not one of Honeywell’s facilities run at its self-imposed highest level of manufacturing.As for its portfolio, we think Honeywell is successfully transitioning toward becoming a software-industrial company. We are bullish on Intelligrated and other warehouse bolt-ons, which we believe will help propel the firm’s productivity solutions business toward a 9% CAGR over the next five years. Encouragingly, only about 5% of U.S. warehouses are automated. Warehouse automation is exposed to strong secular trends, including growth in e-commerce package volumes and omnichannel fulfillment needs. Automation providers like Intelligrated improve manufacturing facilities’ storage and throughput plans. Examples include coordinating equipment to optimize functions like shipping and handling. Automation benefits e-commerce customers by reducing manufacturing costs and increasing workplace safety. In Europe, warehouse automation remains a strong secular trend given stricter labor laws and higher wages. Similar trends should also drive growth in process automation solutions.Finally, we see continuing strong fundamentals in aerospace driven by global air travel, U.S. defense spending, as well as connectivity offerings that are less driven by traditional flight hours.