A Surprising Tech Play?
Honeywell (HON) is about as American as apple pie. This 100-year old North Carolina-based company is famous for its fuel-efficient aircraft engines, indoor climate control units, and performance materials. Trading at a market cap of $120 billion and a massive float (the number of shares publicly available for trading), Honeywell is not the most exciting stock on the market these days. But when you notice that shares are up nearly 75% since the March pandemic-induced lows, and when you realize that the stock is just a hair’s breadth beneath a new all-time high, it’s time to take a deeper look here.
What drew HON to my attention was that, on October 14, someone placed a large, bullish options bet on the stock. A trader with very deep pockets – likely a fund manager – bought more than 2,500 January 180 calls, which at the time were trading at around $8.00 per contract. That $2 million bet will only make money if HON is trading above $188 per share by January 15, about 10% higher than current price levels. That’s not a huge move, but that price level would also be a new all-time high, suggesting that this options trade foresees a strong breakout move between now and then.
So, I dug deeper into recent analysis and came to see what this trader must be seeing. There are several things going on here.
First, Honeywell’s footprint is deep in the construction and efficient operation of data centers. Data centers – those ominous, windowless brown and grey buildings that lack all signage and are surrounded by scary-looking spiky fences, and which use up 1% of the world’s energy supply – are what run everyone’s online apps for things like work, entertainment, banking, ecommerce, and communications. They are being built all over the country.
On October 14, the same day as the big call bet, Honeywell announced a new joint venture with Vertiv (VRT) to supply the operational tech, thermal management, and online security for data centers. This is potentially a huge source of new contracts since the new product line – coming online by end of the year – will provide data centers with remote monitoring, reduction of energy costs, greater sustainability, and a reduction in the overall carbon footprint. With potential regulation in these areas after the election, this new vertical could be a hot ticket.
Second, Honeywell just inked a new five-year “IDIQ” (indefinite delivery, indefinite quantity) contract for an undisclosed amount with the U.S. Army to provide new engines for the CH-47 Chinook helicopter. While there is some initial investment capital required as Honeywell retools its Phoenix, AZ, aerospace unit for production, the projected output of 20 new engines per month is expected to give a nice boost to the bottom line.
Honeywell’s version of the engine will save the Army millions in maintenance and fuel costs over the existing one, and comes with a whopping 133% boost in horsepower. According to AVweb.com, this contract is over and above its current contract with the Army to provide maintenance of the current T55 engine that is also built by Honeywell and is currently running in over 6,000 copters, including 900 Chinooks.
But here’s the most compelling reason to buy Honeywell now…
The surge in ecommerce due to the global pandemic lockdowns is creating a very real problem: too much stuff and not enough storage space. Warehouses and delivery chains were already stressed by the major shift this decade from big box to online retailing. Now the situation is worse, much worse. While this may be bad news for shoppers looking to get their items sent quickly, it is good news indeed for companies that sell warehouse automation equipment. Who is the global leader in this area? Honeywell!
According to Baird analyst Rick Eastman – a 5-star stock picker with an 81% win rate and 21.6% return on investment per pick, according to TipRanks.com – we are at the front edge of an “ecommerce super cycle of investment” in warehouse automation. In 2016, Honeywell bought Intelligrated, a leader in smart-warehouse automation, and through that merger is now positioned as the best of breed supplier of complete warehouse automation solutions. Bingo! Supply meets demand.
Action to Take: Consider adding shares of HON to your long-term conservative portfolio at a price of $180 or lower. $250 would be a place to begin banking gains along with the 2.15% dividend payments you will receive.
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