On June 18th Honeywell International Inc. (NYSE:HON) hosted its Paris Air Show Aerospace analyst event in Paris. Presenters included Darius Adamczyk, President & CEO, Tim Mahoney, President & CEO Honeywell Aerospace, Kristin Slyker, VP & GM Services & Connectivity, and other senior members of the Honeywell Aerospace management team. The overall focus was on Honeywell’s Connectivity initiative. The company also reiterated its focus on commercializing its Aerospace operations (with a focus on Repair, Modification, & Upgrade (RMU) opportunities), noting significant progress over the past 12 months. On the margin it does appear that the Defense market is doing somewhat better. The CEO also provided some general updates indicating that the quarter is broadly on track (although Bank of America Merrill Lynch believes that the company is positioning for another beat and raise in 2Q). The firm maintains Buy and its $145 PO.
In terms of strategic update, while BAML did expects some more clarity on Aerospace at the end of the summer, it did not expects an actual Aerospace spin announcement. However, the firm could sees an announcement regarding a spin of a smaller business (i.e. Transportation Systems). While BAML did sees Honeywell trimming some of its assets in its portfolio going forward, it sees the idea of Aerospace spin as disruptive while creating limited upside on an SOTP basis. While Honeywell's CEO has noted that the number of core businesses could be reduced over time, the firm expects this to be a multi-year process with strategic updates coming out gradually over the next several years.
Honeywell highlighted a broad ramp down of investment into major programs (with very few new large programs competed going forward), noting five key levers for Aerospace growth acceleration into '18 & beyond: Continuing growth in aftermarket driven by air traffic growth; Growth in defense spending - the company highlighted the positive impact of budget uncertainty resolution in the US and improving outlook for international spending driven in particular by S.E. Asia (this seems to be an area of potential upside in '17); Business aviation starting to improve sometime in late '18; Emphasis on growth in the RMU business as major program R&D is starting to roll off. Management highlighted increased sales spending and successful commercialization efforts in the past 12 months; Fewer concessions to OEMs with '16 being the peak and comps getting easier into '18.