Darius Adamczyk, Honeywell International’s CEO since April, has a tough act to follow. Under predecessor David Cote, who led the industrial technology conglomerate for 15 years, Honeywell averaged double-digit annual earnings gains, while its stock returned a total of 11% a year, about four percentage points ahead of the S&P 500 index. Cote was also named Chief Executive of the Year in 2013 by his peers for his managerial resourcefulness in bringing together many disparate acquisitions.
What are the odds that his successor Darius Adamczyk, 51, a Polish native with a Harvard MBA, can keep the good times rolling? The new CEO, who has led several Honeywell businesses, inherits a company with rich opportunities to grow, according to several observers, especially in software, to expand profit margins and to generate more free cash.
“Higher software sales are going to lengthen the runway of margin expansion,” says Jason Adams, an analyst at T. Rowe Price. Barclays’ Scott R. Davis believes that Honeywell International’s new CEO is inheriting a company that is “culturally and physically in great shape for a management transition.”
Adamczyk’s plans are what one might expect. He’s inheriting a company set to increase free cash flow in future years, and as the new man in charge, it’s natural that he would want to stamp his mark on the company by making acquisitions and divestitures.
Even the dominant aerospace business, challenged in part by a weak business-jet market, looks poised to generate bigger profits. But aerospace has been a worry for Honeywell. In late April, activist hedge fund firm Third Point took a position in the Morris Plains, NJ company and called for it to spin off its aerospace unit, arguing that such a transaction “would result in a sustained increase in shareholder value in excess of $20 billion.” Honeywell has refused to comment on Third Point’s request.
Adamczyk is reviewing the company’s portfolio with an eye toward weeding out underperforming businesses. An aerospace spinoff, however, is unlikely. Honeywell has invested more than $18 billion in that division since 2010, and the unit has won a place on various aircraft platforms, including the planned Boeing 777X. Aerospace had the second-highest profit margin among the four operating groups in the latest quarter. However, Deutsche Bank analyst John George Inch notes that incentives paid by the unit to aerospace equipment makers are likely to fall in the next two years as current product cycles age, adding $80 million to $100 million in profits.
If Adamczyk delivers as expected, Honeywell’s revenue could rise 4% next year, and earnings, 10%, leading to a higher price/earnings ratio and a 15% total return on shares. Capital spending could drop by some $200 million in the next few years as well, which could boost free cash flow. Free cash has already risen nearly 40% in the first six months of this year, to $2 billion. This should help Honeywell fund acquisitions, repurchase shares, and grow its dividends, all priorities that won’t change under its new CEO.
In remarks made to investors last June, Adamczyk highlighted four key areas of focus:
- Accelerating organic growth
- Expanding margins via productivity rigor
- Becoming a software-industrial company
- More aggressive capital deployment
This may prove a smart growth strategy and, if he executes this successfully, such initiatives bode well for Adamczyk’s tenure.