Honeywell 2Q25: Thesis Intact

Sales Growth: 8% y/y

Organic Growth: 5% y/y

GAAP EPS: $2.45, 4% y/y

Honeywell reported a fine 2Q, with 8% topline growth and 4% EPS growth. Most of the margin pressure was felt in the Aerospace business where they have absorbed certain tariff costs but have yet to pass them on to customers. It's nice to see backlog up 10% y/y organically but the guide feels a little light. I believe this traded down after the print because Aerospace was disappointing on both a growth and margin front. As I've watch Honeywell these last two quarters, it seems to trade much more in-line with the fundamental momentum of the Aerospace business then either Automation or ESSP/Advanced Materials.

In the Q&A section of the earnings call the Barclays analyst asked about the margin contraction in Aerospace and management disclosed that much of the margin contraction was transitory. The CAES acquisition is dragging on margins (100bps) and they had some destocking from Commercial OEs. If it's truly one time expenses I'm not at all concerned. You would really like to see them push all or most of tariff costs along to customers over the coming quarters, though. Peer models have notoriously strong ability to push price and so if the Aerospace business wants to command a standalone multiple near those peers it needs to exhibit similar levels of competitive dominance.

But qualitatively the thesis is very alive. Honeywell added Marc Steinberg, a partner at Elliott, to the board. They also announced further business rationalization and are searching for strategic alternatives to their Productivity Solutions and Services and Workflow Solutions segments. The planned spinoffs are "on time" and proceeding without "commercial disruption". The Advanced Materials business, soon to be Solstice Advanced Materials, confirmed a 4Q spinoff and will trade under the ticker SOLS on the NASDAQ. Honeywell also announced two bolt-on acquisitions. It's nice to see them adding to the portfolio where it makes sense, as it supports the idea that they're rationalizing and not simply pruning.

I'll be looking forward to the Solstice Advanced Materials Investor Day later this year and will get together with the Brigham Capital Special Sits team to see how we feel about continuing to hold it as a standalone company. I'll provide that update when the time is right. I think this will continue to trade in step with the underlying performance of the Aerospace business, which makes me all the more excited to own that business as a standalone entity. Clearly people already believe it's the most important of all the Honeywell businesses. My one fear owning Honeywell at this point in time is the valuation, which feels particularly rich for a low-growth company. This is what keeps it at a nominal 2% weight of the portfolio. However, the Aerospace business, and the multiples commanded by peers like Transdigm and Heico, eases my concerns surrounding valuation.