Aerospace giant has flown above the slump – so far

For those who remember the 1960s or early ’70s, those for whom long hair, bell-bottoms and medallions on hairy chests still evoke a hint of embarrassment, the name “Honeywell” has a special significance.

For them, it meant the Vietnam War. Honeywell then had a famous defence division that produced things like cluster bombs, guidance missile systems, napalm and land mines. To ’60s ‘hippies’, at least, the company seemed to be at the centre of what former US President Dwight D Eisenhower had warned against when he spoke of the “military-industrial complex”.

So it has always seemed a little strange to me that even with the Vietnam War well behind it, and having made an important mark in the extraordinary evolution of the computer industry, Honeywell found itself being acquired by a much larger company, Allied Signals. Allied was twice the size of Honeywell but the merged group, in its wisdom, chose to call itself after the smaller partner, Honeywell International, because the name recognition was better.

The name is holding the company in good stead. It now has 127,000 employees and sales of $39bn (€35.4bn), a massive range of products, from jet engines to gas detectors, and is valued at $80bn. The company operates a number of business groups; aerospace, automation-control solutions and performance materials. Its largest is the aerospace division, with sales of $15.6bn, which focuses on products such as cockpit voice recorders, radar, flight data, cabin entertainment and lighting. Its defence and space business includes guidance systems, space systems and navigation and communication systems.

The automation and control solutions (ACS) division, with sales of $14.5bn, is a global provider for sensing controls, scanners including barcodes, gas detectors and industrial safety products.

It also has an energy and security business, making burglar and fire alarms for homes and businesses.

The performance materials division, while the smallest, still has sales of $10bn. The division is involved in process technologies and automation solutions, for the oil and gas refining, power generation and mining industries. It is also involved in resins, waxes, adhesives, aerosols and speciality chemicals for the electronic industry.

Shortly after the Allied Signals merger in 2003, GE bid $42bn for Honeywell. The bid was a last-minute trumping of one from United Technologies (UTC). Unfortunately for GE, it was rejected by the EU competition authority. In the last few weeks, it has been reported that Honeywell is in talks regarding a proposed $90bn merger with UTC, owner of Pratt and Whitney engines and Otis elevators. Such a merger would create a giant supplier to the aerospace and building industries, with annual sales of $100bn. UTC rebuffed the proposal, saying it presented significant regulatory problems, customer concerns and valuation issues. On cue, aircraft makers Boeing and Bombardier indicated their opposition to the merger. While there is considerable overlap between the firms in automation and control and the aerospace business, the merger (or even a hostile bid) faces an uphill battle.

Recently, Honeywell completed its five-year plan, which saw sales increase from $32bn to $39bn. Investors are pleased that net income doubled during this period to $4.8bn, and in the same period dividends increased over 50pc. Honeywell sales and income for last year defied the slump experienced by some of its competitors.

In the past five years the company’s shares are up 90pc, way ahead of its peers, and trade at $103, slightly off its record high of $111 in the middle of last year.

Should the merger fail, the company still has enough firepower to continue its acquisition strategy and is projecting sales of $46bn to $51bn for 2018. Given its performance in the last decade, the share may be worth considering, but is the stock defensive enough to meet the demands of current markets? Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned

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