Honeywell is well-positioned to capitalize on pockets of strength in the economy

Published Tue, Dec 6 20221:01 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Honeywell International (HON) Chairman and CEO Darius Adamczyk sees some hurdles ahead for the U.S. in 2023 but overall believes the economy will not become a "disaster." It's an outlook that balances areas of strength within Honeywell's businesses alongside weaker spots — nuance that we appreciate from the Club holding's top boss. The view from the top "I'm not overly pessimistic on 2023," Adamczyk said Tuesday morning on CNBC. "I do think the economy is going to be tougher than it was in 2022, but I don't think it's going to be a disaster." For Honeywell, in particular, this means some parts of its business are better positioned than others. "We see the full spectrum," said Adamczyk, who's led the industrial conglomerate since 2017. "Some of our segments we are kind of preparing for a storm. Other segments are growing very, very quickly, and we're trying to bring on as many people as we possibly can," he added. Aerospace well positioned Honeywell's aerospace division — which supplies parts to plane makers Boeing (BA) and European rival Airbus — falls on the positive end of the economic spectrum. "On the aerospace side, we have more demand than the supply chain can actually keep up with," Adamczyk said. "I think the supply chain challenges are real, and they're still there. They're getting a little bit better, but they're still there." Aerospace is a large slice of Honeywell's pie, so continued strength there is especially notable. The segment is on track to account for roughly one-third of Honeywell's 2022 revenue and roughly 40% of its operating income, according to recent Bank of America estimates. Honeywell's description of the aerospace market mirrors what we heard earlier Tuesday from the CEO of Raytheon Technologies (RTX). In a CNBC interview, Raytheon's Greg Hayes said that demand from commercial aerospace customers is "incredible." Raytheon owns airplane engine maker Pratt & Whitney and systems software provider Collins Aerospace. Warehouse automation weaker While Honeywell's warehouse automation business saw growth in the first two years of the Covid pandemic, it's been hurt by the shift in consumer spending toward services, away from goods. The change in how dollars are being spent has led to challenges for retailers and, by extension, softened demand for Honeywell's warehouse automation offerings. "We look at the other end like warehouse automation, which is really tied to retail growth and products and distribution. It's been a tougher market for us," Adamczyk said. "Then we have just about everything that's in between." Two important things to keep in mind on the warehouse automation unit: The first is management expects the unit to expand margins next year despite the topline pressures. This means that revenue growth may decline year-over-year, but each dollar of warehouse automation sales could be more profitable in 2023 than in 2022. The second is the overall size of the business compared to stronger areas like aerospace. Warehouse automation is part of Honeywell's safety and productivity solutions segment, which BofA estimates to be about 20% of the company's 2022 sales and 12% of its operating income. The Club's take From an investment perspective, we appreciate the economic outlook offered by Adamczyk, which stands in contrast to some of the doom-and-gloom predictions put forth elsewhere. Some believe the Federal Reserve's interest rate-hiking cycle will inevitably tip the country into a recession in the coming months. We understand there are challenges associated with taming the hottest inflation in the U.S. in nearly 40 years. But where the Club differs from the most negative prognosticators is we think there are still attractive parts of the market — and that this moment, in general, will benefit those who are opportunistic — those companies like Honeywell. It's about finding the appropriate places to be, not heading for the hills altogether. "Darius [Adamczyk] has reshuffled his portfolio," Jim Cramer said during Tuesday's "Morning Meeting," referring to Honeywell's decision five years ago to spin off business units focused on automotive and home heating into separate companies. The result was a better-focused and more efficient Honeywell. "Now he's got the right products for the right time. Darius is too conservative to say, 'Listen, we're going to have a great year,' but what he is is opportunistic," Jim said. "[ JPMorgan Chase CEO] Jamie Dimon, on the other hand, makes me feel like I should be frozen in place because it's so dangerous out there. It's been dangerous out there all my life," Jim continued. "There are times in life where you must say, 'This is good.' And what the Fed is doing is good. It's going to help us all" eventually. The Club currently has a 2 rating on Honeywell shares, meaning we'd wait for a pullback before buying; the stock is up more than 14% over the past three months, and it's important not to chase it. However, our outlook on the company is positive overall. In addition to aerospace, we also see favorable conditions in its UOP division , which makes products used in petroleum refineries. (Jim Cramer's Charitable Trust is long HON. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Darius Adamczyk, CEO, Honeywell speaking at the World Economic Forum in Davos, Switzerland on Jan. 23, 2020.

Adam Galecia | CNBC