Honeywell Adds Value With Sparta Systems Acquisition

On Dec. 22, wide-moat rated Honeywell HON announced that it is acquiring Sparta Systems from New Mountain Capital. The market reacted somewhat negatively to the news, which we found perplexing—the stock traded downward about 1% on the trading day. As we've run the numbers, we've modeled some modest value accretion. We raise our fair value estimate to $181 from $179 per share (about a 1% raise), but we point out only $1 of the raise is due to the latest acquisition, with the remaining $1 coming from time value of money since our last update. Nonetheless, we still see the stock as modestly overvalued, although we would not want to be against the company, which has among the strongest moats and management teams in our U.S. multi-industry coverage. Honeywell has historically been a disciplined acquirer and has a successful track record of integrating acquisitions like Intelligrated back in 2016. Based on our reading and initial survey of industry reports, Honeywell's assumptions seem entirely reasonable. Honeywell is paying $1.3 billion in an all-cash transaction for Sparta. Sparta sells quality management software that multiple industry reports project should grow about 10% year on year. We expect some modest segment operating margin accretion (25 basis points) in 2021 in Honeywell's performance materials and technologies segment on $400 million in incremental sales, which adds $2 worth of intrinsic value to our base and bull cases (but adds no value in our bear case). QMS sales are generally driven by the need to improve product quality, increase efficiency, and to satisfy customer demands. Tailwinds in this industry include stronger standards and the need to comply with new regulations.

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