Wall Street goes through cycles. One that recurs with some regularity is the shift between conglomeration and corporate separations. Right now, conglomerates are separating, creating multiple businesses from one. Honeywell is a good example of this trend, with the conglomerate breaking into Honeywell Technologies (HON +0.95%), Solstice Advanced Materials (SOLS +3.85%), and Honeywell Aerospace (HONA +3.90%). If you are thinking about buying one of these three companies, you may want to consider following the CEO who orchestrated the corporate split. Here's what you need to know.
What is the point of a conglomerate like Honeywell? When it comes to acquisitions, there can be a fine line between a CEO who is simply trying to build an empire and one who is piecing together a coherent business. Honeywell was a large industrial company with the financial resources to support the businesses it operated. Bringing more industrial businesses under one roof could increase revenue diversification, eliminate redundant tasks (such as accounting), share technology and innovation among businesses, and enable enhanced access to capital markets. Those are all good things, but conglomerates also have their downsides. For example, business units often compete for funding. Bureaucracy can slow down decision-making. And sometimes small or underperforming business units get ignored, making poor performance hard to fix. When the negatives outweigh the positives, conglomerates often spin off businesses or break up, as Honeywell has done.
That said, Wall Street's desire for de-conglomeration can also lead to business breakups simply to satisfy shifts in investor sentiment. By breaking a business into parts, each new business can focus all its energy on just one thing, which is expected to lead to improved results. Sometimes it works out, sometimes it doesn't, but it is usually worth watching to see which company the CEO who initiated the corporate split sticks around to manage.
What is Honeywell today? The company that retained the HON ticker is Honeywell Technologies, a pure-play industrial automation business. This is the company run by Vimal Kapur, the CEO who led Honeywell when it was an industrial conglomerate. This suggests he believes automation is the most desirable business within Honeywell, noting that artificial intelligence (AI) is likely to be an important trend in industrial automation. When the company reported second-quarter 2026 earnings, the reason for his choice became clear. Honeywell Aerospace didn't spin off until June 29, so it was still part of Honeywell for the quarter but will not be part of it going forward. Honeywell provided two sets of earnings: one with Honeywell Aerospace included and one without. Orders rose 4% with both businesses, but when isolated, Honeywell Automation saw a 16% increase. Meanwhile, Honeywell Automation accounted for $20 billion of the combined $38 billion backlog, and adjusted earnings rose 10% year over year. Automation appears to be the business set to grow more rapidly.
Honeywell Aerospace reported lower organic sales growth guidance in its second-quarter earnings, indicating a rocky start. However, Solstice Advanced Materials, the first spun-off business, reported an 11% year-over-year sales increase and a 23% jump in earnings per share in the second quarter, increasing its full-year guidance. Despite its smaller market cap of roughly $9.5 billion compared to Honeywell's $65 billion, Solstice Advanced Materials shows strong performance.
You can make a case for owning any of the three businesses. Honeywell Aerospace’s initial guidance drop might make it the easiest to pass over, though the aviation industry has long-term potential. Solstice Advanced Materials, while showing solid early results, is the smallest of the three, which could be seen as a negative. The focus remains on Honeywell’s automation business, which is large and performing well, with a growing backlog and a 10% year-over-year earnings increase. The CEO’s decision to oversee Honeywell’s automation operations further supports this as the best pick. Though, to be honest, I’d have preferred Honeywell to remain a diversified conglomerate.
Source: The Motley Fool
