How Honeywell Makes its Money (HON)

Few American companies are as productive – literally, productive – as Honeywell International Inc. (HON). The global company publicly lists all 600+ of the goods and services it develops. To provide a representative sample of their products, that would be 2D barcode scanners, brake pads, commercial boilers, flat panel displays, industrial pigments, planarization materials, rubber insulation, silicone sealants, thermocouples and water mixing valves. 

Honeywell is a true conglomerate in a world of ever-greater specialization, its reach ranging from ubiquitous civilian products (thermostats found in every home) to the most specialized military equipment such as helicopter engines.

If it wasn’t for mankind’s innate need to arm itself against enemies, Honeywell might be only a large-to-medium-sized enterprise. Honeywell is a giant defense contractor, a large vendor to the United States Armed Forces, which is not to mention the company’s substantial interests in Poland, Germany, Turkey, and several other countries. 

While Honeywell might have gotten its start in a previous century by making heating control products, today the company’s aerospace operations have grown to the point that they’ve become their own reporting segment. In fact, it’s Honeywell’s largest. Aerospace accounts for a consistent 36% of company revenue. 

Honeywell has two other major reporting segments: automation and control solutions, and performance materials and technologies. The former includes almost everything that makes modern life comfortable and habitable. Our great-grandparents were content with four walls, a roof, and maybe a chimney. The accouterments that are standard issue in modern living – heating, cooling, humidifying, airflow, etc. – are largely the work of Honeywell and its competitors. 

The company undertakes gigantic projects that require huge outlays of both labor and capital. Oil refineries in India, wastewater treatment in Los Angeles – there’s a reason why Honeywell employs over 22,000 engineers, who themselves are just a small part of a global workforce whose population is larger than that of New Haven, Conn. 

It’s been mostly good years for Honeywell in the last decade, and by extension for the company’s investors. The company reported a net loss of  $2.41 billion in Q4 2017 due to an expected provisional tax charge of $3.8 billion. Nonetheless, total revenue increased by 3% in the fiscal year of 2017 compared to the year before and the company turned a total segment profit of $7.7 billion in the fiscal year of 2017.

As for performance materials and technologies, this is the avant garde section of the Honeywell product suite; the never-before-conceived fibers and polymers that can only be created, let alone marketed, in an environment where bright people are collected and given one of the world’s largest research and development (R&D) budgets. Investments into R&D are key to maintaining and/or improving competitiveness for the long term, and Honeywell spent about $2.1 billion on it in 2016. 

Honeywell has a market capitalization of about $122 billion as of Jan 26, 2018. When a company reaches the size of a Honeywell and stays at that level for years, acquisitions become an inescapable part of doing business. But what’s also important is the flip side to acquisitions – divestitures. (For related reading, see: How Can a Divestiture Help a Company?)

The list of companies that Honeywell has bought, either whole or in part, since 2002 is overwhelming. It includes some lightly publicized but indispensable regional companies, such as a Singaporean safety shoe manufacturer bought out for $338 million or a San Jose-based maker of gas detection systems brought under the Honeywell blanket for $340 million. 

Just as relevant is the list of companies that Honeywell has unloaded in the same period. Between 2002 and 2015, Honeywell bought 84 companies and ended up with about 65, adding about $12 billion in annual sales, according to WSJ. Management had a talent for not only finding gems, but buying them via the proceeds gained from selling off lesser performers. 

Innovation isn’t just a byword, nor is it a sufficient condition for a giant multinational to prosper in the 21st century. But Honeywell manages to not only stay on top in an industry with large barriers to entry, it consistently adapts.

In the 1980s, it would have been hard to imagine a New Jersey-based maker of medical scanners and the metallic film that pills come in taking on multimillion-dollar emission control projects in China. Yet there Honeywell is, continuing to add value for shareholders and customers alike, almost anywhere civilization stands to benefit.