Honeywell prepares for the first part of its split into 3 companies. Here’s what you get
Another separation is on the horizon. Later this month, Honeywell will spin off its Solstice Advanced Materials business. Honeywell shareholders will receive one Solstice share for every four Honeywell shares, effective October 17. The two companies will begin trading independently on October 30; Solstice will retain its code SOLS, while Honeywell will retain its existing code HON. The upcoming turnaround is the first step in Honeywell’s multi-stage separation plan. Honeywell will spin off its remaining automation and aviation businesses in the second half of 2026, a move first encouraged by activist investment management firm Elliott Management about a year ago. When Elliott first called for these changes, he sent a letter to Honeywell management detailing his more than $5 billion investment in the company. Elliott’s thesis was that the conglomerate structure was no longer appropriate and that Honeywell’s different divisions would benefit from a more simplified and focused organizational structure. They pointed to the successful breakups of United Technologies, General Electric, and Ingersoll Rand as examples of how simplification can unlock significant value. Meanwhile, Honeywell is in the process of reviewing its Productivity Solutions and Services (PSS) and Warehouse and Workflow Solutions (WSS) businesses for strategic alternatives to further simplify its automation business. So there’s a lot of change going on here. HON YTD mountain Honeywell YTD But what exactly do shareholders get with the introduction of Solstice? The company is a midsize specialty chemicals business with sales of approximately $4 billion and almost $1 billion in standalone adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It sells a diverse range of products including refrigerants (34% of sales), building solutions and intermediates (20%), research and performance chemicals (13%), alternative energy services (12%), electronic materials (10%), healthcare packaging (6%) and security and defense solutions (5%). Solstice reports its financials through two segments: Refrigerants & Applied Solutions and Electronics & Specialty Materials. The larger segment, Refrigerants and Applied Solutions, accounts for net sales of approximately $2.7 billion in 2024, or more than two-thirds of sales, with a strong adjusted EBITDA margin of just under 40%. The largest product group is refrigerants, which account for approximately half of the segment’s revenue and serve attractive end markets such as stationary HVAC (heating, ventilation and air conditioning), data center cooling and automotive HVAC. It also has a broad portfolio of building solutions and intermediate products used for higher performance insulation and consumer and industrial aerosols. The segment’s alternative energy services cater to the nuclear industry, and its healthcare business focuses on ultra-high moisture barrier polymer used in healthcare packaging and propellants used in inhalers. The Electronics and Specialty Materials business generated net sales of approximately $1 billion last year with an adjusted EBITDA margin of 19.2%; which made it the slower-growing, lower-margin of the two. Research and Performance chemicals account for slightly less than half of the segment’s sales and appeal to the chemical, pharmaceutical and construction markets. Just over a third of the segment’s sales are from electronics, and the business draws on many of the themes we discussed with DuPont spinoff Qnity Electronics. The third piece of Solstice’s Electronics and Specialty Materials division is security and defense solutions, where Solstice produces fibers used in ballistic materials sold in U.S. military applications. Geographically, the company generates 61% of its sales from the United States, 23% from the Europe, Middle East and Africa (EMEA) region, and the final 16% from other international markets. Despite its global footprint, Solstice was resilient to tariffs and changes in global supply chains due to its local manufacturing. Approximately 90% of its sales in the United States are produced within the United States, and approximately 60% of sales to the rest of the world are produced in the respective regions. Management said that in cases where tariffs were incurred, it acted quickly to cover costs or move supply chains to a more suitable location to reduce the impact. Let’s talk about financial matters. Solstice grew sales from $2.8 billion in 2017 to $3.8 billion in 2024; This represents a compound annual growth rate of 4.4%. This is slightly better than its peer group’s average CAGR (compound annual growth rate) of 3.9%. Solstice describes its peer group as eight other specialty chemical companies: Avient, Chemours, Eastman, Element, Entegris, Materion and RPM. Solstice’s profitability was better than its peer group in 2024, at 26.4% compared to the peer average of 17.8%. The company also generated a much higher return on its invested capital, an important metric for capital-intensive businesses. In 2024, Solstice’s return on invested capital (ROIC) was 21.5%; this was more than double the peer average of 8.4%. Although the company touts itself with a “track record of above-market growth with best-in-class margins and returns,” we should also note that sales have stagnated over the past few years. Sales progress increased from $3.6 billion in 2022 and 2023 to $3.8 billion in 2024. At the company’s investor event last week, Solstice forecast revenue for all of 2025 from $3.75 billion to $3.85 billion. Going forward, management’s medium-term framework is to deliver organic net sales compound annual growth in the low to mid-single digits with adjusted EBITDA. mid-single digit percentage. The company is also going public with a strong balance sheet, with 1.5x net leverage, which is crucial in the cyclical chemicals industry. Net leverage measures a company’s net debt relative to its adjusted EBITDA. It appears that Solstice has a solid industry-leading business that is outperforming its peer group. But this looks like a good house in a bad neighborhood, and these don’t always make good investments. We prefer to grow and this has been missing for the last few years. To counter this, management repeatedly emphasized at Investor Day that it believes the business is at an inflection point thanks to continued growth trends in advanced computing, environmental and energy evolution, improving health outcomes, and personal security defense. But there is still a lot of exposure to more cyclical markets. As a result, we’ll be watching how Solstice trades after the split, and a dynamic could emerge where shareholders sell Solstice to acquire more core Honeywell to gain more influence in the aerospace division, our favorite of the three companies. When the aerospace business ends, the remaining Honeywell will be a fully automated company. However, in the long run and as the economy improves, Solstice is expected to benefit from being an independent company and stand out in its industry due to its exposure to strong themes. (Jim Cramer’s Charitable Trust is a long-time HON, DD. See here for a complete list of its stocks.) 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