Gratitude, Growth and Great Investments: Lessons from Thanksgiving and Charles Mizrahi: Lessons from Thanksgiving and Charles Mizrahi

When I was a boy in Hope, Arkansas, the part of Thanksgiving I loved most was my Uncle Garvin’s annual visit.

Uncle Garvin was an accountant and a lifelong bachelor from Houston. He was an impressive figure whenever he arrived by bus in Hope.

He owned stocks (I could hardly imagine such a thing!) and carried a real leather suitcase with travel tags, not like the cardboard suitcase we owned but never used.

And he wore a suit, tie and starched white shirt — every day!

In our town, if you saw a man in a suit, it could mean only one of two things: either it was Sunday, or he was going to or coming from a funeral.

Over the holidays, while my parents were at work, Uncle Garvin was the only adult in the house. When he wasn’t taking his daily unbreakable appointment with the “Perry Mason” rerun, I would constantly pester him to play checkers with me.

And he played to win. In fact, he relished beating me … which he did over and over and over.

Do you have a favorite holiday memory? Share it with us here.

Looking back now, I realize what a huge favor Uncle Garvin did for me by developing my competitive spirit.

These days, not everyone has the incentive to work hard and get better — individuals and companies.

Call me crazy, but I believe there’s something to be said for competition and rewarding hard work, talent and intelligence.

This month’s recommendation checks all the boxes. It has a strong competitive advantage, a history of hard work and focused growth strategies.

Every Thanksgiving, when I give thanks to God for my countless blessings, I include a little prayer of thanks to my Uncle Garvin for teaching me this lesson.

And this year, of course, I’m thankful for all of you. Like many of you, I’m grateful to Charles Mizrahi for seeing stocks as pieces of a business — the best lesson he taught me.

I wasn’t the only one that was grateful for Charles’ insight. Here are just a few of the many emails (edited) we receive each week about Charles…

It’s great to hear from all of you! Like me, we appreciate Charles’ simple, easy-to-understand approach to making big money in the stock market. Thanks, Charles!

And in this month’s recommendation, he’s recommending a company that is going to split into two — unlocking huge amounts of shareholder value.

You won’t see this company’s potential if you only see stocks as wiggles and jiggles on a chart.

Now, that’s definitely something to be thankful for…

— Mike Huckabee

It was one of the greatest comebacks in corporate America … ever.

A new CEO came into a terrible situation. People were rooting for his failure. The Board of Directors instructed the CFO not to show the incoming CEO the financial books.

That’s how bad the numbers were after years of failed acquisitions and poor management.

But this CEO was a rock star — a leader with a vision and the ability to execute. He came to the company with an attitude of doing the right thing for its long-term success.

CEO Dave Cote allocated billions of dollars in all the right places and started to turn the company around.

The result?

After 16 years of righting the ship, he grew the company’s market capitalization from around $20 billion to nearly $120 billion — a 10X increase.

Delivering returns of 800% and beating the S&P by nearly two and a half times. (I kicked myself for missing it all those years ago!)

Today, we’re getting another opportunity to potentially make outsized gains.

It’s a $150 billion company with great businesses, but it should be doing much better. Mr. Market is not pricing in this company’s potential.

An activist investor has recently taken a major position and is working on a turnaround plan for the company. The plan is to simplify the business, which should unlock huge shareholder value.

We see the turnaround as a one-foot hurdle while Mr. Market is sleeping at the switch. That spells a profit opportunity for us.

I’m confident about the turnaround happening because the activist investor has done it before, and the stock price soared.

Lightening is about to strike twice, and that’s why we are adding this industrial giant to the portfolio.

Honeywell International (HON) has been a cornerstone of American industry for nearly 140 years, pioneering technologies that have transformed sectors.

Here’s why we like the company…

Starting in 1885 with the invention of the damper flapper — an early thermostat — the company grew into a leader in heating controls before expanding into aerospace, industrial automation and more.

Its modern form emerged after a 1999 merger with AlliedSignal, but challenges followed, including a failed acquisition by GE in 2000.

When Dave Cote became CEO in February 2002, he streamlined operations and focused Honeywell on “great positions in good industries.”

His strategy positioned the company as a leader in aerospace, industrial automation and energy solutions — markets with strong long-term growth potential.

Dave Cote turned things around in one of the greatest corporate comebacks ever.

In fact, I spoke to him about his success at Honeywell a few years back. What he did while CEO is now taught in business schools. But that’s not what he wanted his legacy to be. Click below to hear what he told me:

How Honeywell Under Dave Cote Impacted Generations

Cote left Honeywell in great financial shape.

Here are Honeywell’s four main businesses (2023 Revenue: $36.7 billion)

The real crown jewel of Honeywell is its Aerospace segment.

It’s a top global supplier to commercial aviation, offering proprietary products across major platforms. With industry-leading R&D and durable, high-margin aftermarket sales, it has long-term customer loyalty and profitability.

Honeywell’s products are often critical but represent a small portion of customers’ total costs. For example, an auxiliary power unit costs less than 1% of a plane’s price, but it’s vital for safety.

Switching suppliers often costs more due to downtime, redesigns and regulatory hurdles. That makes Honeywell the better long-term choice and why customers stick with them.

Honeywell’s reputation for quality and reliability gives it pricing power and keeps customers. Customers are willing to pay a premium for its products because it delivers better value through durability, availability and strong customer support.

Honeywell’s large number of customers brings in steady recurring revenue from selling replacement parts and offering maintenance services, which are very profitable.

Cote’s leadership established Honeywell as a market leader, positioning the company for sustained growth and delivering strong value to shareholders. But over the past few years, the world has changed, and Honeywell didn’t.

Under Cote’s leadership, beginning in 2002, Honeywell became an operational powerhouse, transforming from a struggling business into a top performer.

From 2004 through 2019, Honeywell delivered a 14% annual earnings per share (EPS) growth rate and a 642% total shareholder return, outpacing its peers and setting the gold standard for diversified industrial companies.

However, since 2019, Honeywell has struggled to maintain its momentum.

For the past five years, EPS growth slowed to just 3% annually, and total shareholder return was a modest 37%, underperforming the S&P 500 index.

Investors lost confidence in Honeywell’s ability to create value under its current conglomerate structure. Conglomerates face big challenges operationally and in telling their story to investors.

Honeywell must solve its issues, find new ways to grow, and succeed in becoming a top performer again. An activist investor believes in Honeywell’s potential and is betting big money on its comeback.

On November 12, 2024, activist investor Elliott Management, led by founder/CEO Paul Singer, announced in an open letter to Honeywell that it had invested $5 billion — making it the largest active investor in the company.

This is Elliott’s most significant investment ever, showing its strong belief in Honeywell’s potential to unlock significant value.

Elliott thinks the problem is clear, and so is the solution: Honeywell’s current conglomerate structure no longer works — it’s time to simplify.

We totally agree.

Honeywell is one of the most diversified industrial companies, with 12 reporting lines, 700 sites and 100,000 employees across 80 countries. This massive scale makes it a global powerhouse but also creates challenges in management and investor clarity.

For example, Honeywell’s business leaders get only 40% of their short-term bonuses and less than 20% of their long-term rewards based on their division’s performance.

Most of their rewards depend on the performance of the whole company, not their specific division. On top of that, their stock awards are in Honeywell shares, which they can’t influence much because the company is so big and diverse. This means management’s incentives are not aligned with driving division-level success.

Simplification has consistently enhanced business focus and valuation. That’s not unusual. Many conglomerates, such as GE and Johnson Controls, have streamlined operations to improve performance and boost shareholder returns.

For example…

United Technologies, a century-old industrial giant, was known for its diverse portfolio, including aerospace, elevators and HVAC systems.

In April 2020, the company was divided into three specialized businesses — Otis, Carrier, and Raytheon Technologies — to streamline operations and increase value. (In our other research service, 8-Figure Fortunes,  we recommended Otis and successfully closed the position with a 95% gain.)

The breakup allowed each company to focus on its strengths.

Otis capitalized on the growing demand for elevator modernization, Carrier expanded into areas like AI-driven cooling systems, and Raytheon streamlined its aerospace and defense operations. This sharper focus helped each company better serve its markets.

The results speak for themselves: since the split, Carrier shares have increased 367%, Raytheon has increased 169% and Otis has increased 127%.

Bottom line: Breaking up conglomerates can deliver strong shareholder returns.

Elliott believes Honeywell can unlock tremendous value by splitting into two focused companies: Aerospace and Automation.

Each of these businesses is already largely independent and industry-leading. Honeywell Aerospace ranks as a top-five global supplier, and Honeywell Automation generates nearly $20 billion in annual revenue.

The reasons to separate are very strong:

Vimal Kapur became CEO in 2023, following Darius Adamczyk, who succeeded Cote.

Kapur has taken steps to create a clearer strategic focus, including plans to spin off Advanced Materials by the end of 2025.

On November 22, 2034, Honeywell announced it would sell its personal protective equipment (PPE) business to Protective Industrial Products for $1.3 billion in cash. This move is part of CEO Vimal Kapur’s plan to focus on growth areas like automation, aviation, and energy transition and simplify the business.

While promising, these actions are only the beginning.

Solving Honeywell’s complexity as a large, diversified company is key to reaching its full potential and creating long-term value. Our research shows this is achievable.

Honeywell has an opportunity to follow in the footsteps of its peers by simplifying its structure.

Simplification drives growth and creates significant value. For Honeywell, this would be the key to unlocking its full potential.

Splitting Honeywell into Aerospace and Automation would give each business its own board with industry experts and management focused only on their specific area.

Currently, Honeywell’s board lacks specialized knowledge in critical areas like aerospace, a common issue for conglomerates.

When companies split, they often add experts to their boards, which helps with better decision-making. Separating the businesses would also make it easier for management to focus on their goals.

A survey of Honeywell’s largest investors revealed that more than 80% prefer pure-play companies over conglomerates. Analysts and shareholders have long supported this idea, and the current market conditions make it the perfect time to act.

Today, Honeywell leaders’ compensation is only a small portion tied to their segment’s performance, while equity awards are tied to the overall company.

A split would tie compensation directly to each business, improving focus, alignment and the ability to attract top talent.

In the past, conglomerates offered diversification all under one roof and one stock ticker, simplifying investing.

Today, however, investors can easily build diversified portfolios using ETFs and indices, making conglomerates less relevant. Modern investors prefer targeted exposure and no longer rely on management to allocate capital across multiple industries.

This shift is clear in fund allocations. Active managers now underweight industrial conglomerates, which are at historic lows compared to other S&P 500 sectors.

Honeywell’s institutional ownership has steadily declined, reflecting a trend toward favoring pure-play businesses.

Meanwhile, companies like GE, which simplified their structure, have seen significant investor re-weighting and valuation growth.

Diversification, once a selling point for conglomerates, now works against them. Underperformance in one segment can drag down the entire company’s valuation.

For Honeywell, its sprawling portfolio of 12 reporting lines often includes at least one weak link, creating a “least common denominator” effect that limits its appeal.

Honeywell currently trades at a discount to peers despite its strong aerospace exposure. Other conglomerates have shown that simplifying and splitting into focused companies can unlock significant value.

We’re bullish on Elliott because of its long track record of activism.

One success story of splitting a company into two sounds very similar to what they are proposing for Honeywell.

On November 4, 2016, Elliott increased their stake to 9% in Arconic Inc., criticizing its leadership for poor performance and driving major changes. After a proxy battle, Elliott secured three board seats and pushed out CEO Klaus Kleinfeld.

Elliott’s influence led to the 2019 decision to split Arconic into two focused companies: Howmet Aerospace, specializing in engineered products and Arconic Corporation, focusing on rolled aluminum.

The separation, completed in April 2020, streamlined operations and unlocked significant value.

Since the split, Arconic’s stock rose 333% before its 2023 acquisition, while Howmet Aerospace delivered an impressive 788% return by November 2024.

Elliott’s success with Arconic shows they know how to unlock value. Their proven track record and a similar situation setting up for a Honeywell split could yield significant value for shareholders.

This is in addition to the fact that Honeywell is already a market leader and an ace in the hole…

A competitive advantage separates great companies from the rest. It’s the key to staying ahead of competitors, earning customer loyalty and driving long-term growth.

Companies with strong competitive advantages don’t just survive — they thrive, even in tough markets.

Honeywell’s aerospace business is a prime example, leveraging its edge to dominate the industry for decades.

Honeywell’s Aerospace business has a competitive advantage in spades. It’s the strongest and most profitable.

It follows a “razor-and-blade” model: Honeywell supplies essential parts (the “razor”) to aircraft manufacturers and then earns steady revenue from maintenance, repairs and upgrades (the “blades”) for decades.

About 90% of jets, planes and helicopters use Honeywell parts, including auxiliary power units, which Honeywell invented in 1948.

The aerospace industry is hard to enter because of strict rules and advanced technology, giving Honeywell a big advantage.

Once Honeywell’s parts are built into an aircraft, they stay there for decades, creating long-term recurring revenue. Big manufacturers like Boeing and Airbus work closely with Honeywell to develop high-quality parts for their planes.

Honeywell’s success comes from strong relationships, technical know-how and over 70 years of proven performance.

It invests more in research and development than most competitors, spending around 5% of Aerospace revenue on innovation.

The U.S. government also contributes to Honeywell’s R&D, pushing the total investment to over 7% of sales, which helps Honeywell lead the field without taking on all the costs.

Switching costs also works in Honeywell’s favor. Once an aircraft part is certified, replacing it is expensive and risky, keeping customers loyal. Planes often stay in service for over 30 years, giving Honeywell reliable revenue from repairs and upgrades.

With its razor-and-blade model, cutting-edge technology and strong customer relationships, Honeywell’s aerospace business is built for long-term success. It offers steady growth and profits for investors.

Honeywell is well-positioned to capitalize on three major industry trends: aviation, automation and energy transition.

Source: Honeywell Portfolio Update. October 8, 2024.

1. The aviation industry is experiencing strong growth, with rising demand for planes and an expected annual growth rate of over 5%.

Honeywell gains a lot from this trend because it already has thousands of engines, brakes, and communication systems installed in airplanes all over the world. This large base generates $8 billion annually in recurring revenue from parts and servicing, positioning Honeywell to thrive as the aviation market expands.

2. The global industrial automation market, valued at $175 billion in 2020, is growing rapidly at about 9% annually. Honeywell, with its advanced logistics and warehouse automation technologies, is well-positioned to benefit from this trend.

Over 10,000 warehouses use Honeywell’s material handling systems, while more than 1 million workers rely on its voice technology daily, achieving 99% order accuracy. Additionally, Honeywell’s RFID readers ensure near-perfect inventory tracking, making it a key player in this expanding market.

3. The global energy transition is creating new growth opportunities while still supporting traditional energy needs. Honeywell benefits from this shift with its proprietary sustainable solutions.

Its carbon capture technology removes 15 million tons of CO2 annually, equal to the emissions of over 3 million cars. Over 600 sites rely on Honeywell’s advanced process controls for better efficiency, and its methane detection systems are expected to prevent 140 million metric tons of CO2 emissions by 2030, positioning the company as a leader in sustainability.

These mega trends are strong tailwinds propelling Honeywell toward higher growth and a stronger competitive advantage.

Mr. Market’s skepticism is our opportunity.

When Elliott bought shares of Honeywell, we expected the stock price to surge.

Yet, since the announcement on November 12, Honeywell’s stock has barely moved, increasing slightly from $224 to $231, a gain of less than 3%. So, why hasn’t the market reacted?

Here’s why we believe Mr. Market is sleeping at the switch.

Elliott’s basic idea is this: by focusing on fewer core businesses, Honeywell can operate more efficiently and drive higher profits.

However, Mr. Market remains skeptical.

Critics argue that splitting the company might not immediately lead to higher stock prices. They worry about the risks of restructuring and whether a spin-off would deliver real benefits.

Additionally, Honeywell’s leaders already have a strong reputation for running a complex business successfully, so some doubt whether Elliott’s suggestions will add significant value.

We reject this point of view, and here’s why…

Elliott’s push for simplification aligns with a growing trend among major corporations. Breaking up into smaller, more focused companies often helps unlock hidden value.

For Honeywell, separating its high-growth automation segment from its stable aerospace business could help investors see the true potential of each part.

For example, Honeywell’s automation division is thriving in a fast-growing market for industrial and warehouse technologies, while aerospace benefits from steady demand for planes and aftermarket services.

By operating independently, these businesses could attract more targeted investments and achieve higher growth.

Our research shows Elliott has a strong track record of pushing companies to make changes that benefit shareholders.

Honeywell’s stock hasn’t gone up yet, but this might just be a case of investors not noticing its value right away. This gives us a great chance to buy shares while the price is still low.

Here’s how Honeywell stacks up to our Alpha-4 Approach…

Alpha Market: Honeywell is well-positioned to capitalize on three major multi-billion dollar industry trends: aviation, automation and energy transition.

Alpha Leadership: Since Vimal Kapur became CEO in 2023, the company has taken steps to create a clearer strategic focus, including plans to spin off Advanced Materials by the end of 2025 and the recent sale of its PPE business for $1.3 billion in cash.

Alpha Money: In 2023, Honeywell’s four main businesses delivered $36.7 billion in revenue and $4.1 billion in free cash flow. Profit margins have been steady or improving over the past four years, averaging an impressive 22%. Each of these businesses operates with a high degree of independence, leads its respective industry and benefits from strong competitive advantages.

Alpha Price: With the stock trading around $231 per share, we have a great opportunity to buy Honeywell today for a great price prior to the splits.

Honeywell will likely split into two companies. Our valuation is broken down by segment:

Honeywell Aerospace’s current earnings per share are $4.60. Based on our research and factoring in a margin of safety, Aerospace should be able to grow earnings per share by 12% annually over the next four years.

Based on that growth rate, earnings per share would be around $7 in 2028. Applying at a 32X multiple, the share price should be around $230 per share or a 100% return.

Honeywell Automation’s current earnings per share are $4.50. Based on our research and factoring in a margin of safety, Automation should be able to grow earnings per share by 13% annually over the next four years.

Based on that growth rate, earnings per share would be around $7 in 2028. Applying at a 24X multiple, the share price should be around $170 per share or a 100% return.

Combining both segments, dividends and other assets like Honeywell Advanced Materials, the stock would be worth around $450 per share or 100% in four years.

Action to Take: Buy Honeywell International (HON).

If you have any questions, please send them my way at [email protected].

And follow me on X here for daily updates…

NOTE: In the November 20, 2024 update, I updated the buy-up-to price for Brookfield Corp. (BN) from $48 to $55 per share.

Regards,

Charles Mizrahi

Founder, Alpha Investor

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