Motley Fool Hidden Gems Investing - Picking the Winners of the Honeywell Breakup

Episode Date: June 30, 2026

The Honeywell International of 10 years ago is now six different publicly traded companies. This week, Honeywell International split with Honeywell Aerospace to complete the pre-planned separation. Tyler, Matt, and Lou look break down the prospects for the disparate parts as standalone companies and pick which ones will be the outperformers based on recent spinoffs and separateions. Plus, a busy week of deals and an investor question about covered call ETFs Tyler Crowe, Matt Frankel, and Lou Whiteman discuss: - Digital Realty buying data centers - Building materials industry consolidation - Keeping track of what assets went where at Honeywell - Recent successes (and failures) with spinoffs - Mailbag: When to covered call index ETFs work? Companies discussed: DLR, BX, CSL, OC, MLM, BLD, QXO, ON, SYNA, HON, HONA, SOLS, QNT, GE, GEV, GEHC, RTX, CARR, OTIS, DOW, DD, CTVA, CMCSA, BRK-B, SPYI, QQQI, CHPY, BTCI Host: Tyler Crowe Guests: Matt Frankel, Lou Whiteman Engineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

We're talking matchups and breakups today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Matt Frankel and Luke Whiteman. So we just got to the end of the Honeywell kind of breakup phase that's been going on for a year. So we're going to dive deep into that today. And of course, we're also going to hit the mailbag like we always do. But we wanted going to start today with, you know, it's July 4th weekend coming up and apparently Wall Street bankers want to clear their plates before the July 4th weekend because there's been a ton of deals that have happened in the last couple of days.

Yesterday, John Quast, the host and company, they covered the Comcast split and the Rocket Lab acquisition. Matt, I think you were part of that discussion there. And since then, we've seen even more deals come through. I've read four of them within the past 24 hours. And what I want to do today is we're going to go through all four of them and then I want you guys to tell me, which one of these do you actually like the most? We had Digital Realty buying data centers from Blackstone for about $3.5 billion. We have Carlyle Companies, a building

supply company, doing an unsolicited bid for Owens Corning. So not done yet, but looks like something's going to happen. You've got a materials company, Martin Marietta Minerals, buying a limestone supplier for $13.5 billion. And then On Semiconductor is buying Synaptics for about $7 billion. So, Matt, I feel like somebody who loves REITs is going to go in a certain direction here. Am I right? Yeah. I mean, I like playing the AI boom with stocks that I understand, like the picks and shovels plays, the infrastructure plays, like data center REITs. Digital Realty has been probably one of the top two or three longest running dividend stocks in my portfolio. you. The deal is interesting to me. The stock is down 5% after the deal. The company is purchasing

Blackstone's roughly two-thirds interest when you combine all of them in three data centers in Northern Virginia for $3.5 billion. $1.2 billion is coming in cash. The other $2.3 billion digital realty is issuing new shares. They're going to need about $1.4 billion of additional CapEx to complete the development of these. None of them are occupied or operational yet. And Digital Realty is assuming some debt as part of the deal as well. So they were already the minority owner of these three properties, just to be clear. They're just buying out Blackstone's majority stake. All three of them are already 100% leased to hyperscalers on 15-year deals with 3.6% annual rent escalators. So it should help the company more than keep up with inflation

when it comes to their rent. Two of them are supposed to be occupied and stabilized in the first half of next year, the third in the first half of 2028. Matt, you're making a pretty compelling case here, but the market doesn't seem to agree because the stock's down about 5% as we're recording. So why do you think the market may be a little less as on board with this idea as you are? Yeah, and it's a good question. There are a few different reasons why. So, I mean, for one, digital realty says this is going to be accretive to FFO, which is funds from operations, the real estate version of earnings, but not until these properties are fully occupied and stabilized, which won't happen for a while.

In the near term, it's probably going to hurt the earnings numbers. Plus, as I mentioned, they're selling $2.3 billion of new stock. And not only that, but Blackstone's selling $2.3 billion of its own digital realty stake. So it's a dilutive deal. You're going to see a lot of stock hit the market at the same time. The FFO benefit is delayed. It's a fair price. It's a cap rate of 6.5% in real estate, which is that's OK. It's a fair price. It's not a bargain for top quality assets. And like I said, it's going to hurt the numbers in the near term. So it's not a perfect deal. But long term,

I like the strategy here. Yeah, it's funny. I'll take the other side of that trade. The goal of private equity is to be ruthlessly unsentimental, to buy low and sell high. And for Blackstone, they're cashing out on an asset with massive continuing capex at a premium. I get it for digital realty. I'm not saying it's going to be a terrible deal for them, but I'd rather be sitting on Blackstone's side. And I do think that this is what private equity does well. But I don't want to be boring and just focus on one deal. So let's broaden it a bit. Tyler, Carlyle's bid for Owens Corning and then the Martin Marietta deal too, they both intrigue me because they suggest that there are management teams out there who think it is time to be greedy when others are fearful.

There's been a ton of headwinds in construction, especially on the residential side. We'll see, they may be too early here, but the sort of animal spirits in construction slash residential construction, I feel like as an investor, even if I don't want to invest in those companies, it's a data point I should pay attention to that these management teams feel like it's time to stick their necks out. Yeah, and this certainly isn't the first time we've been hearing this consolidation of the building products space going on in the past couple of years. I feel like this has been a continuing trend in a slow market, whether that's to grow the top line now while everything's weak or to your point of seeing the bottom.

One of the companies that we like to discuss here, or at least the man behind a lot of companies, brad jacobs uh he has a his company qxo which is basically a building products roll-up company uh recently acquired top build which was an insulation building products company there is a lot of consolidation going on here and it's it's an interesting like side note to me because a lot of these companies have been for much of like the 2010s and into the 2020s they were good like quality companies doing really well that have hit the skids. And it's going to be fascinating to see when renovation, new build cycle starts again with these kind of beefed up companies, whether or not, you know, these acquisitions made them better or they just kind of made them

bigger. Right. Because sometimes acquisitions can go both ways. We're still too early. But how too whirly are we here is kind of, and, you know, and the management's wherewithal to get things done. That's the interesting question. And we'll just take from this and sort of learn as they do. You know, not to leave OnSemi and Synaptics out of the conversation too much here. This is a company where, you know, OnSemi, I don't want to be too diminutive when I say this, but they're kind of like the dumb chips, right? When we think of like what we use semiconductors for these are kind of the comp the chips that you see a lot of uh like automotive companies and anyone who is translating like electronic signals to physical motion them companies like nxp

semiconductors similar companies like that are doing a lot of this in this synaptic deal at least in their words is like combining a lot of machine learning ai inference a lot of that uh kind of kind of the technology the the the platform for which a lot of on semi wants their new chips to be running so that they can start implementing this into you know making i'm going i mean they're kind of dancing around but it's basically like a path towards robotics and you know at the current price it seems to make sense but again like we've been talking about chips as like this hyper growth area but like the the physical motion actuator again a diminutive term the dumb chips have not been exactly the hot thing like we've seen with a lot of the other parts of the business.

So coming up after the break, we want to break down the Honeywell and all of the associated parts that it is now is. It's been about a year for Honeywell International to complete what has been a rather stellar portfolio transformation because this was a large conglomerate that has basically divided up i was i won't say four but i think if we were to back up even further we could go five six seven companies over the past 10 years as to what honeywell has done but this week was kind of the end of the line here where we saw the the biggest breakup and i think where where management says it's going to stop so we've got the legacy honeywell which is going to trade with the old ticker H-O-N.

We've got Honeywell Aerospace with ticker H-O-N-A. And then we've also got Solstice Advanced Materials. This actually was spun out, I believe, back in November of last year, trading on the ticker S-O-L-S. And then I'm going to say this wrong,

Quantinium or Quantinum with two U's. The ticker is Q-N-T. And this was like an IPO that Honeywell kind of owned. it was like their quantum computing division. So I know I gave a little bit of like what they did, but Matt, can you kind of give me like a more of a breakdown of like what all of these companies are going to be doing now that they're on their own and away from the Honeywell corporate blanket? Yeah, well, I'm going to refer to that last one as Quantinium. Lou's going to refer to it as

Quantinium. And between the two of us, one of us will be right. Quantinium just sounds so much cooler. I'm sorry. It does. It does. I think I think I'm the right one, but yours is the cooler one. So here's a quick roundup, just a little bit beyond what Tyler just said. As he mentioned, Honeywell itself is the industrial automation and process automation company. And out of the two that just spun off, Honeywell Aerospace being the other one, it's actually the smaller by revenue. Honeywell Aerospace provides power units, avionics, mechanical systems, parts, services. It is now one of the largest pure play aerospace suppliers that is publicly traded in the world. um that's significant for you'll see why later in the discussion solstice advanced materials

tyler's correct it spun off in october of last year and is it's the specialty materials parts of the business they make uh you know a specialized refrigerant for example uh quantum is an interesting one that was technically an ipo not a spinoff and it's still majority owned by by honeywell i think honeywell and one of its other investors own a combined i think 82 stake in the business This is the full stack quantum computing business. It is a pre-revenue company like any quantum computing pure play is. And their goal is to develop both hardware and software that kind of powers the next wave of computing, which is quantum computing, which at the most optimistic timetables will be a thing in 2030-ish. This was obviously like a lot of different parts here. And there is always the debate of like, be separate, be together. And I feel like we've been having that discussion for who knows how long when it comes to business. So, Lou, make the case like why, like, why were they doing this now? Or what was the case for any of these even being together in the first place? Yeah, it's funny. You can go back to the 1950s in terms of like just these cycles of coming together and breaking apart. But kind of where we were to get to here, Honeywell stock, first of all, has done nothing this decade and kind of wasn't a great performer before then, just flat, which I would argue does not reflect the quality of the assets in the portfolio. Now, some of this was management either, you know, being bold or being silly.

They loaded up with some debt to cobble together these assets. But a lot of it arguably is the so-called conglomerate discount. Conglomerates are companies that are basically in a bunch of different industries. Think of it as a lot of businesses under one roof. There's some advantages to this structure, but ultimately each business has its own capital needs, its own M&A strategy. They operate in different cycles, and the management team for each has to basically go to the parent, go to mom and dad to ask permission every time they want to do something. There's a constant battle for who gets the allowance. The theory in this breakup is, freed from that extra layer of management, each operating team can make decisions that are in the best interest of their unit.

The aerospace business can use all of the cash they're making to invest in the business or, you know, maybe pay a dividend, something like that, instead of sending their cash upstairs for it to be distributed to shareholders or funneled to other parts of the business. In this case, you know, Honeywell Aerospace is a well-run provider of cabinet electronics and other systems, but it doesn't really have a lot of room for margin expansion or maybe not even growth. It's already the market leader where it is. So, you know, for this management team, maybe it's a capital allocation story. Buybacks, bolt-on deals, that's what's going to drive appreciation. The automation business, much earlier in its life cycle, much more just investing in what they do. They're likely to use their cash kind of internally. These are just two management teams free to do what is best for their business instead of listening to what the parent needs.

It's not just Honeywell that has been kind of going through this come together, break apart cycle. Over the past, I want to say, six to 10 years, we have seen a lot of, you could argue, iconic names of industrial conglomerates basically do these breakups. We had GE, General Electric was a gold standard of what a company should be and all of the disciples that Jack Welch created. And now all of a sudden, it's created into three different companies now. We've got GE Aerospace, GE Vernova, and GE Healthcare Technologies. And interestingly enough, like a lot of these companies that go through these spinoffs have gone through pretty disparate returns as a result. Like healthcare technologies was supposed to be the crown jewels and sort of cash generation. Well, since this breakup, aerospace and Vernova have been crushing it while healthcare hasn't.

You had like UTX technologies and Raytheon coming together and then they split back up into RTX, Carrier and Otis. same thing everyone kind of thought like oh raytheon rtx this rtx avionics defense business is going to be a mega grower otis is going to be this high return business we don't know what to do with carrier carrier ends up being the best performer of the group same last one too a dow dupont when they merged together and did a split kind of like consolidating and deconsolidating everyone thought like this agricultural business which is called cortiva was going to be the worst performer and then all of a sudden we're several years after the split us and while you know it dow stock is actually down since dow chemical it's just called dow inc now uh is actually down

since the split and cortiva is the best performer and so i what i'm getting at here is that sometimes the things that we think are going to be the great performers of these split ups isn't necessarily the case and so what i'm going to do is with all of that in mind i want you guys put a little bit of a product, you know, a predictions hat on. I'm not going to say that Honeywell's all their business are going to follow this pattern that we saw with GE, UTX, Dow, DuPont, but, you know, recent examples. So of these spawn of Honeywell that are remaining, which one do you see most likely to be the carrier or the renova of the split that's going to do incredibly well? And the one that's maybe going to be the GE healthcare or the Dow

of this group? So I, full disclosure, I bought Honeywell ahead of the split because I kind of wanted to own Honeywell and Honeywell Aerospace. So for the long term, I like both of those businesses. But as I said before, arguably you're not going to see the same surge as all, like say after the GE breakup, just because of where we are in the cycle for these businesses. One of them, it's kind of already played out some, and one of them is still to come. I like them over five years, I think better than I like them over one year. As for the runt and the litter, Tyler, I am going to cheat and I'm going to lean in on technicality because as you mentioned at the top, this is not Honeywell's first three-way split. In 2018, they spun out their auto business and their thermostat

business, the old Honeywell, what we all think of when we think of Honeywell. That residential control business, Rosario Technologies, was the one that I would have avoided back then. It's the one i'm avoiding today uh honestly the auto business garrett motion was to be avoided until it went through bankruptcy but it's funny i think the first time honeywell sort of took out the i don't want to say take out the trash but kind of took the underperformers and this time what was left was just a desirable group i think what's left is pretty strong but the ones back from 2018 came out with a lot of warts. Yeah. And I would even add the Comcast and NBC Universal deal we saw the other day to the deconglomerate trend. There've been quite a few. You're right. Maybe

Berkshire Hathaway's next. I know Lou would be a fan of that. Not as much as a dividend. Let's say it that way. The problem with doing that is, is that so many of the operating businesses inside Berkshire seem to have just kind of rotted on the vine or aren't as competitive as they were when they were bought. So I'd almost be afraid to, it's almost like a puppy you can't let out into the wild, some of these businesses, unfortunately. There would be a lot of portfolio fixing if we were to actually start doing some Berkshire spinouts. There could be a dozen of them in one company. And in most cases, I mean, the motivation with most of that list you mentioned has been to separate a high growth business or one with a lot of, you know, long-term tailwinds, like a defense

spending trend or something like that from either capital intensive or commoditized, you know, boring businesses. I see Honeywell Aerospace as being the G Evernova of this. It's a pure play. It benefits from one, a reliable revenue stream from its, you know, aftermarket business. It's the surge of global defense spending that, you know, companies like Boeing and Airbus are finally starting to normalize and work through their backlogs. That's a nice trend here. I mean, there have been several recent examples of where, where companies in the aerospace of defense businesses get a premium multiple when they become peer plays. But on the other side, I'll go with Solstice as my GE healthcare.

It's a capital intensive business. It started with about a billion dollars of debt and it's the most boring of the four, but it's also, it's impossible to classify quantum into either basket with all the deconglomerate deals you mentioned. There weren't any speculative, speculative pre revenue companies that were created. It's a binary outcome stock. It should be approached with caution and it could either be it could be either one of the the two baskets that you mentioned something about solstice it sounds incredibly boring it's like chemical solvents that we use for refrigerants and fluorinating uranium for nuclear power and a lot of that stuff and the the more and more you squint at it you're like huh refrigerants data centers that kind of

makes like a weird sense nuclear power growth being the only one that can fluorinate uh uranium as part of its conversion from Yellow Cake to actually Enriched in Radium. That sounds kind of interesting. There's part of me that wants to look at that and in part and be like, man, maybe this was just like a problem child at Honeywell. But if you bring in a management team

that can really like tie this together, there are a lot of long-term catalysts that could be behind this business over the long term. So each of us kind of taking slightly different bets on what could do best at Honeywell. Sorry, I'm so used to talking about breakups with GE, but it is Honeywell this time. Coming up after the break, we'll hit a listener question. Hey, everyone.

Quick reminder, as always, if you want to get your question answered on air, email us at podcasts at fool.com. That's podcasts with an S at fool.com. Three requests as always. Keep it foolish. Keep it short enough we can read on air. and please avoid trying to ask for any sort of personalized advice. We have to keep it as impersonal as possible. So question today comes from Timothy Dombey, and it's related to a lot of

new ETFs that we've been seeing. My question relates to the emergence of investment products that are income generating. A few tickers, for example, SPYI, QQQI, CHPY, and BTCI. These are all covered call strategy ETFs that try to track a index while also writing premiums or writing options on those to generate income. His question is, can you explain the purpose of these products? They appear to cap upside, provide little downside risk, and provide a sold call mechanism. Is there a market scenario where these products actually make sense, Lou? Absolutely, especially for the issuer. Okay. For the buyer, I'm not so sure. I'm not a big fan, but look, you know, there's a product for everyone. As the listener notes, you are capping your upside in return for monthly

income. And, you know, not to be a snit, Matt, but to me, that's what REITs are for. Okay. But look, my real issue here is with these products is the fees. With SPYI and QQQI, two of them they mentioned, you're paying a 0.68% expense ratio, which is really high. The Bitcoin ones, the specialized ones are almost 1%. So you're capping your upside. You're paying through the nose for basically an artificially generated income stream, not, you know, that the net asset value on these things tend to be horrible. So you better get that income stream. I come back to this all the time, but, you know, a lot of products on Wall Street were built to be sold, were built for the fees. not necessarily built because they really, really work for the buyer. And for me, at least,

these fall into that category. Yeah. I mean, technically, Lou, you could buy just the S&P 500 ETF and sell your own covered calls and avoid the fee entirely and generate some income that way. Yeah, you could. That's a lot of work. It is. And that's what these people are being paid for. That's the point. But generally, these funds use covered calls that are just out of the money enough to produce those high single-digit return percentages, which is what most of them target, which also helps them retain some upside potential. The options, they provide income, they hedge a little bit against downside risk, but only somewhat. A sharp decline in like the S&P 500 on one of these would more than offset any options premium they're collecting.

They can be a decent option for retirees and other income-oriented investors. Maybe if I were 70, I would feel a little bit different, who want current income without having to sell the stocks that they own. There are some drawbacks. Lou correctly mentioned the fees, which are on the very high end for essentially index funds. There are also tax implications that you can run into as distributions that come from options premiums are generally not considered qualified dividends, so they can be considered ordinary income and hit your taxes more than you think. They can be a good way to generate income and benefit from volatility. During volatile times, the yields on these tend to rise significantly.

But there are those big trade-offs to keep in mind. If anything, retirees can use them as part of an income bucket. Like Lou said, that's what REITs are for. You can create a whole income bucket, but not as a core income strategy. I want to ask one follow-up here, and it's to kind of Tim's whole part of this, is thinking about the market conditions. in what market conditions do these types of products work and when are they basically going to when are you going to take a bath on them so like when people are thinking about these

sort of things like what should they be looking out for and when is it like okay to perhaps own one of these sort of things these work the best when you have kind of an outlook for low volatility and are mildly bullish on the stock market they perform best when the market or whatever the underlying asset is, is slowly rising, not fast enough. So they're, you know, getting called out of positions or having to roll covered calls or anything like that, but that they're not going down and offsetting that options premium they're generating in the first place. If the S&P rises by like 5% a year, these are golden. But it's really hard to predict when that's going to happen. Yeah. But he said you've capped your upside, so you don't want the market to have too much upside.

Considering how well the market has done this year, it's almost like that might be taking on a little bit more risk than we may want. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements or sponsored content are provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd and the rest of The Motley Fool team. For Lou, Matt, and myself, thanks for listening, and we'll chat again soon.