Deutsche Bank’s John Inch and Karen Lau argue that Honeywell International (HON) is “achieving Asian critical mass.” They explain:
After over a decade of aggressive and earnest Asian investment including seed planting and cultivation of local Asian talent, we believe Honeywell has emerged from behind other western countries in China and the rest of Asia to leading position across its served markets. Honeywell claims (and we believe it is true) that it has become “the” Chinese/Asian competitor that local rivals look to emulate. Honeywell’s profit margins in China are above the corporate averages across the company’s businesses. Meanwhile, we learned that Honeywell is sometimes even the local price leader, such as for scanning and mobility products.
Within China, we estimate Honeywell’s sales to be closing in on $2.8bn (6-7% of company total), roughly flat last year (dragged last year by PMT’s down results due to the collapse in oil prices and associated project deferral), up low to mid single-digits this year (ACS is running up double-digits YTD) and up double-digits next year (and beyond). As part of the $2.8bn, the company reportedly has realized ~$750mm in sales that it classifies as “East for East” (E4E) – developed and produced almost entirely in local markets for local customers (i.e., ACS and turbo with some PMT product applications). We believe the $750mm to be a laudable achievement – particularly given the rapid pace of change of China’s economy over the past decade coupled with aggressive local competition. Honeywell retains #1/#2 positions across a swath of the markets it serves.
Honeywell’s achievement of Chinese “critical mass” opens lots of new doors for the company, in our opinion, including talent attraction/retention and new partnership opportunities. Many of these doors would appear to lead to accelerating future sales. The other prospective benefit of critical mass – specifically driven by the continuity and tenure of Honeywell’s regional leadership team (Honeywell High Growth Region/HGR President & CEO Shane Tedjarati has lived in China for 24 years) – would appear to be a high confidence level toward pursuing and integrating regional M&A. This is not to say that we expect Honeywell to abandon its M&A cost discipline that has earned the company its highly regarded reputation. Honeywell may ultimately pursue only a handful of regional deals over the coming years. Still, as “the” Chinese competitor, more M&A doors are at least increasingly likely to open for Honeywell to evaluate, in our opinion.
Shares of Honeywell International have gained 1.2% to $117.26 at 3:38 p.m. today, while the Industrial Select Sector SPDR ETF (XLI) has risen 1.1% to $56.34.