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On Today's Bloomberg Intelligence Show, we dig inside the big business stories impacting Wall Street in the local markets.
Each and every week we provide in research and data on some of the two thousand companies and one hundred and thirty industries our analysts cover worldwide.
Today, we'll look at why negotiations between Boeing and it's striking workers are at an in pass.
Discuss why Honeywell International is planning to spin off its advanced materials division.
But first we begin with some big news for Alphabet's Google.
This week, we heard that the US DOJ is considering asking a federal judge to force Google to sell off parts of its business.
This will be a historic breakup of one of the world's biggest tech companies. For more, we were joined by Mandep Singh, Bloomberg Intelligence Senior technost.
We first asked man Deep what he actually thinks will happen now with Google.
Well, so there are three big lawsuits out there against Google in the US, two from DOJ. One is the monopoly lawsuit with the lost and that's where we're looking at remedies. The other one is also from dj against their ad tech business, where the DOJ is looking at their at tech stack and how you know, they control all parts of the stack. The third one is from the you know, different state attorney journals, again targeting their
at tech business. So when I look at, you know, everything that obviously the regulators want to change with Google, the ad tech piece is the one which comes up over and over again, the fact that they control different parts of the as tec. Now in the monopoly lawsuit, they're talking about a force breakup of the Chrome business or the play store business, Android business. I think it's very hard to take out, you know, a single product from a company like Google and say this is a
separate entity. It's just like it's all run or shared infrastructure. I can't imagine you know, doing that with Google, and you know, doing it successfully in the sense that Android can be a separate company. Maybe YouTube, But again with YouTube, it's run on that same infrastructure that searches run on. So how do you split that infrastructure. It's very hard to do it at the product level.
All right, here's some inside Bloomberg for you. You can get really smart on a new piece of information that just hit the tape about a company type in the ticker g oog L for Google in equity. Then hit BCO BICO for Bloomberg Intelligence Company Research, and you get what's called a recent event reaction. So I want to know immediately what Mandeep Singh thinks about this stuff. And what
I read I didn't expect to read. We see a breakup of Google's add tech business as the most likely outcome for remedy in the company's monopoly case with the US Justice Department. I thought what I would have read is don't worry about it, but this has some teeth. Here is what you're kind.
Of well, because they lost that first lawsuit at the dog and the second one the ad tech as well. It's very likely that the judge will rule against Google. So when you lose the cases, there has to be both behavior and structural remedy. And in the case of behavior remedy, yeah, they can't make those payments to Apple anymore. To be the default search or any other hardware maker, they will have to open up Android to offer search screens so that you just don't have to use Chrome
or Google Search. You can use bing Search for example. So choice screens is another behavior. But the structural remedy in terms of a forced sale, I find it hard to believe that the dot will ask them to sell a product. It has to be more at the technology stack level.
So when we go to.
The ad tech stack, maybe that just dumptail with what you were saying. So what does control the ad tech stack mean when you're talking about Google.
So think of how an ad exchange works. You have the supply side, you know, in terms of the publisher ad inventory, and then you have the demand side, the advertisers who are buying those ads, and then you have the exchange in the middle, who is matching the supply and the demand side for ads. Google has products across the stack where they have a demand side platform, they have a supply side ad platform. They are an online exchange and they've built it over the years because they
made a few acquisitions. Double Click was the most notable one where they acquired all the capabilities to really operate as an entity that knows everything when it comes to digital ads being sold in the marketplace. So they control that stack end to end. That's why when you compare Google's ad pricing to everyone else out there, they are
far superior. One they have the best targeting. The other is when you're operating a stack where you have the dominant product across the different pieces, you have a pricing advantage. And that's what you know. The regulators are saying that this company controls pretty much everything in the ads stack.
But the advertisers themselves they're not complaining, of course not.
I mean they're getting like, who are they protecting?
This is a solution in search of a problem here in my opinion, because I have a competition in this market. I think I have competition. I mean, I Google's huge, so it's Facebook, and now I've got this little company in a Seattle called Amazon. They're monsters advertising player. So where's the problem here?
So it all comes down to how you look at the market. If you look at the market the way you just described, where Meta is as formidable as Google and Amazon is a big third player, then yes there is competition. But when you look at certain type of ads, whether it's on the desktop or you know the third party ads that are going through Google Ad Exchange, these companies don't overlap. Like remember, Meta is a walled garden, even though it's big in terms of the digital ad advertising,
it's its own world garden. Amazon is its own world garden Google. So these companies have their own swim lanes. They are big in terms of the digital ad dollars, but they have their own swim lanes. They don't overlap. And that's the objection that I think regulators have.
Okay, so if they wound up, you know, moving around that ad tech stack and changing stuff up, what does that change look like and how much money could then Google lose?
Well? So Google Search obviously is a two hundred billion dollars rund rate business, still the cash cow for Google. That's where you know the Google Network piece, which is the ads that Google shows on third party platforms. So one is Google showing ads on YouTube and their own search page. The other is Google showing ad on let's say a New York Times or some other publisher. Because it's going through the Google Ad Exchange. That's the part that can be divested where and it's a thirty two
billion dollars rundred business. Within that two hundred billion, that's the part that's not growing, but you could argue could be split up in a way where I think Google maybe a smaller search ad business. But at the same time that will appease the regulators because they're not controlling different parts of the ads tack.
Our thanks to Man Deep Seeing Bloomberg Intelligence senior tech industry analyst.
Earlier this year, French multi billion dollar brand Perier came under scrutiny following the discovery of traces of fecal matter in one of the seven wells used to source its mineral water. As a result, Perrier owner Nesle said it had to close some of its wells in recent months.
Now, the globe water business is grappling with questions of sustainability. It's a subject of a Bloomberg Big Take story entitled Perrier Contamination Woes add to three hundred and thirty billion dollars sectors hurdles.
For more we were drawn by one of the story's co authors, Dasha afanasch Vieva, a Bloomberg Consumer goods reporter.
We first asked Dasha to break down her findings from the story.
So at the start of this year, Nesse had to admit that it had been illegally filtering its mineral water in France and in particular Perier. And the reason why it's legal is because mineral water, under French law and actually European law, you shouldn't really do much stuff with it. It's supposed to be quite natural, whereas they were using
charcoal filters and using UV filters. So they kind of come clean on that because there's a leaked report that forces them to and then a few months later there's another leaked report that says, well, there's vehical contaminants and pesticide contaminants and pfast contaminants in the source the Perier saw. And then after that, the other thing that happens is that they have to suspend a well because of contaminants. So it's all kind of wrapped up in trust issues
and contaminants. But I'd like to hide like no food safety issues and no health issues.
So how does this evolve? Like how does Perry fix it? Like how much is going to cost all that good stuff?
Yeah, Perry found out back in twenty twenty that it was doing this. It was doing the legal filtering. But a new boss came in in twenty twenty and realized they were doing this filtering and then brought in a program to modernize the plant so you wouldn't have to do it anymore. And that whole time they were in
conversation with regulators. They say to upgrade production and also get everything shipshape, and they invested in modernizing the plant something to the tune of one hundred and fifty million euros. So they're saying, now it's all good, nothing to see here, but that one well out of seven is still shut, it is still suspended.
I should say this water, this is big business for France. Reading your article today, Dasha, the world's biggest bottled water exporting country, that be, France has fought hard to preserve the integrity and identity of its water with an eye on jobs and growth. The industry contributes one billion euros each year to France's external trade indirectly or indirectly employees
about thirty eight thousand people. So this is big business here, and I would think the brand value is what it's all about here, So they have to be careful, don't they.
I think it is about the brand value. And Perry has had issues with this in the past decades and decades ago when there was a benzine contamination, so it did this massive recall, a global recall. So it has form. And this very product hinges on this premium status and on this idea that it's sort of pure and better than tap water. So you have to preserve that in the eye of the consumer. And maybe the individual consumer
might not care how you're filtering it. But over time, these sort of this trick if you will have news definitely tarnishes or can tarnish the brand potentially.
How big is a business is this? Like I got a so to stream at home. You know, we bubble up our regular old New York tap water. But talk to me about the industry at large.
It's not a huge business for Nesle, Forinestle, it's only three point five percent of revenue. But the industry globally is around three hundred and six a billion and growing around four percent a year, so it is rather large, but as I say, not huge for Nestle.
So I mean, I guess if you're thinking about a green economy, you ask a good question here in the article. Does it make ecological sense to transport millions of bottles of water, about ninety seven percent of them made from plastic, across the globe instead of sourcing it locally. How did the French think about that?
Well, the French would say, our mineral water is super special and are amazing tarooa. It's a bit like with wine. You know, it comes from this incredible terrowire and we have the minerals, we have this heritage of producing it.
And that's the rut of Perie's marketing. But what Perrier's done to protect its future revenue streams is they've said, well, we'll have this other whole other product called Maison Perier that they can filter how much they want because it's not called mineral water, and it's now fronted by Emily and Paris active Lily Collins, and it still travels to the US. So even if you're making these if you think the Taro War French era is so so special.
If you're filtering the water, you sort of think, well, why not just get the water in the US and filter it? And the reason is marketing.
Our thanks to Dasha Afanasieva, Bloomberg Consumer Goods Reporter.
Coming up, we're going to look at sustainable aviation fuel and why it's important and how it's being used.
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We move next to the planemaker Boeing. This week, negotiations between Boeing and its striking workers broke down.
Boeing withdrew a contract offer to striking workers that would have given them a thirty percent raise over four years. The contract also included at boost to retirement benefits.
The impath leaves Boeing with no clear path forward to overcome a month's long strike, and production remains shut down at it's key commercial manufacturing based on the US West Coast.
For more, we were joined by George ferguson Bloomberg Intelligence senior Aerospace, defense and airlines analysts.
We first asked George why he thinks Boeing with through its contract offer.
I think you, if you're at the company, you have to, you know, make it look like there's a scarcity. I think, to whatever you offer right, so that the employees already to jump the next time you give them. I think, you know, a decent contract terms, but I don't know that it works here, right, So I think that it's interesting that they withdrew their offer. But I guess at the same time, I'm looking at the dock workers strike and they just got an agreement for what sixty percent
over six years. It looks like ten percent a year to me if my mask still works Boeing. Boeing, folks, I think rejected a contract there's what thirty percent over four years. I think they're probably more highly skilled workers, no offense to the dock workers, but manufacturing airplanes a little more challenging, I think so. I think sort of the withdraws Boeing trying to make it feel scarce. I'm not sure that it works, George.
The more I think about this story, the more I'd read about this story, it just doesn't look good from a Boeing perspective in terms of leverage here. But if I'm the union, if my guys can hit last a few more weeks, I can really flick some pain here on this company here, which strengthens my position. How do the pros think about this negotiation between these two sides?
Yeah, I mean I agree. I think it's really challenging. Like I just said, you know, we've seen other increases in the marketplace for union labor higher than what this union's asking for. If you're Boeing, you just can't possibly be replaced thirty three thousand employees. There's just no way.
And on top of it, again, there's skilled employees right, so they're handmaking aircraft, right, And if you decided you were going to backfill and train some, you'd have to have people on hand to train the new people coming in to make an airplane. Well, it's just it's impossible to replace them. And now where I think we're in this game of chicken, right where like we've talked about previously,
Boeing's potentially gonna have a downgrade. But look, I think the downgrade doesn't matter as much anyways, Right, it's just a credit rating. You can get it back later on. This is the recovery of this company. That cash is dwindling. They have a lot of airplanes sitting in inventory. They need to get back to work, and I think if the workers can find a way to hold out, they can get a lot of what they've asked for.
So I understand that. Then Boeing has to front it, right, they have to act like they're also playing hardball. How long do you think they can really realistically sustain that?
So, I mean that's the question, right, can Boeing last longer than the workers? If the workers can hold out multiple months, I don't think the company can hold out multiple months. I don't think there's customers that aren't getting airplanes, Like air Bus isn't making a lot of hay out of this, right, They're having similar problems with their supply chains, so it's not like they can surge and take a
bunch of market share away. But Boeing can't let this go on for three or four months, right, that would start to hurt I think their market share. I think you see customers get in the airbus queue just thinking. Look, I just don't know when Boeing is going to write this ship and really build airplanes in large numbers anytime soon.
So I don't think they have a quarter.
I don't think they have three months.
How far apart do you think that the two sides are? And is there any smart money betting on timing?
So I don't know. I don't know if what smart money's betting on right now. But look, it seems like when you pull back your contract and you stop talking and the union goes to its corner and they're kind of irritated, it seems like something hasn't been set up well right. To me, frankly, I think it's just it's probably bad negotiating, right, don't you always kind of try to engage to a certain degree. So to me, it feels like it feels like they're really far apart because
of just the rhetoric I'm hearing in the press. But like again, like a lot of things in life, some money can go a long way, can put smiles back in people's faces, and so you know, you could be surprised overnight if Boeing turns around and sweet and the offer and tries to get the deal done. But right now it feels like they're a distance apart.
Well, aside from wages obviously, which is a big one, what's another really big sticking point or do you think it all just boils down to wages at this point.
I think a lot of it boils down to wages. You know, we have heard that the union wants the pension back. I just can't believe they realistically thinking they're getting the pension back. But so I gotta believe they're looking for a sweetener on the four to one k, you know, some sort of added incentive there. And then the airplane. I haven't heard a lot of noise about
negotiation about the next airplane. Again, if I were the union, especially if I was a union leadership, the machinist leadership, I would want the next Boeing seven thirty seven successor built in the Pacific Northwest in plants that machinists are working at because that's the life bullet of your union, right and that's the life butt.
Of Boeing our thanks to George Ferguson, Bloomberg Intelligence Senior Aerospace, Defense and Airlines analysts.
Each week we look at research from Bloomberg and e F previously known as Bloomberg New Energy Finance. They're the team at Bloomberg that tracks and analyzes the energy transition from commodities to power, transport, industries, buildings, and the ag sector.
This se IF, we took a look at sustainable aviation fuel from where we were joined by Anna Davies BNEF, head of Renewables Fuels.
We first asked Anna to explain what sustainable aviation fuel is and how it's being used.
What is sustainable aviation fuel? You use it exactly like that. You can throw it in your private jet and go and it'll work just the same way. Really, it is, in its simplest form, molecularly, pretty much identical to fossil jet fuel. The only difference is it doesn't come from fossil fuels, so mostly it comes at the moment from biofuels. So instead of having a crude oil, you're using a biooil, so something like soybean oil or use cooking oil, the leftover oils from your deep fryer.
Which would be the issue now, supply or demand when it comes to saff that is.
A very good question, because everybody says we need more, there's not enough produced. There's all this demand that we need to.
Replace fossil jet.
But we have seen both suppliers and actually airlines kind of push back roll back their targets right now. The problem is it's expensive and nobody is really willing to pay it, So we see buyers not quite willing or able to step in to take it, and as a result, we don't see suppliers able to secure financing to build their facilities.
So how do That's a Chicken and Yan type type of thing. How do you think you solve for that? Is that bringing the cost of production down? Is it trying to stimulate demand somehow?
So we anticipate the cost of production at p nof, We try and calculate and marsh exactly, and we do not see the cost coming down to reach parity. Really like current jet fuel prices, it's always going to be orders a couple orders a magnitude above so the real crux that's needed is policy. You need to have a policy push to either incentivize its uptake or force it, and we're seeing both of those policies developing.
Which basically what that means is that have to subsidize the difference between staff and regular jet fuel. And what the IRA did it was really helpful and incentivizing the supply, but not the demand side of it. How close do you think that is right now?
So the IRA, the Inflation Reduction Act, does offer a tax credit for sustainable aviation fuel production, which does help to project app there's still a lot of uncertainty as to what will qualify. You need to have a certain amount of types of feedstock in order to bring your actual emissions reduction down.
That's a big issue in the market.
It also is not only in place for a couple of years, which isn't going to help finance a thirty year facility. You see places like Europe taking the opposite approach where they're just mandating blending in so they're saying airlines and airports have to blend a certain amount and that's going to ramp up of the next few years.
Sort it out, figure out the cost.
And then you see places like Singapore which is actually imposing a levee on airline tickets and saying, Okay, we think staff is going to cost this much in order to blend in we have blending targets. We're just going to put an additional cost on airline tickets.
In order to cover the cost of staff. I mean, see what works in theory?
That makes sense, right, Like you just pass it down to the consumer. But it does point out that any anyergy transition that you can do will eventually be then passed on to the consumer.
Consumer, tax payer.
Yeah.
Probably interesting. So what the US airlines are here? I'm just reading some of your research here. So BNF tracks airline net zero commitments and sustainable aviation fuel commitments, and currently forty four airlines counting for just under half of jet fuel consum globally have some saf target usually ten percent by twenty thirty. Is that good enough?
Well, it's a target, So the question is will they hit those target?
Is it real?
Can they do that?
And that's where we are starting to see some airlines procure staff volumes, like United procures a lot if you fly out if you fly on say United out of San Francisco or La Chances.
Are there some staff in the tank.
Can they blended?
They can blend it one for one.
That's one of the beautiful things about sustainable aviation fuel.
Well, only that you can just like easy replacement, you can take the jet fuel allowed and put it back in versus if you did a hydrogen plane or some other kind of plane.
Yeah, so you don't need new tanks or new aircrafts. You can blend it up to fifty percent currently is the regulatory system.
It is currently.
Produced in very small quantities. So right now, less than one percent of all jet fuel a sustainable aviation fuel, so we're talking very small volumes. It's produced a lot of oil and gas companies and refiners are in on this space. So next see there's a company called World Energy and one called Montana Renewables that are producing at the moment we're seeing P sixty six and Valero through their partnerships with Darling Ingredients.
To those are regular refiners.
So does who does jet fuel today?
A lot of the refinery, So if you think of a refinery, go talk to the refinery.
So you guys need to put out more.
And a lot of them are looking at it because a lot of the process at the moment is similar. You basically, instead of taking a crude oil, you take a biooil, you put it through a refinery and get sustainable aviation fuel. So you can actually convert some existing oil refineries to take biofeedstocks and therefore make these biofuels.
So we are seeing them active.
What about the okay, so a different question, how do you think this industry develops and where does the strength develop?
So a lot of this is policy led. We are starting to see a lot of policies support it though, because.
Aviation is one of the crucks.
You can make these types of sustainable fuels into a whole lot of things. You can make diesel molecules, you can make methanol molecules, petrochemicals. But aviation is the industry where there aren't any really good alternatives, especially if you're looking at like a twenty fifty SAP or net zero target, because hydrogen aircraft, electric aircraft, it takes decades to get those off the ground. It takes decades for fleets to
roll over. So if you really want to decarbonize aviation by twenty fifty, you're going to need to decarbonize the fuel that they're currently using. So this is the area where we're seeing a lot of policies start to move. I've mentioned a few of them. We're starting to see some interest from different producers. We're starting to see a lot of investment going into this because everybody assumes.
The market will get there.
So, for instance, there's a different way of producing it where you take green hydrogen and captured carbon dioxide to make the fuel. That's popular because you don't have the food verus fuel issues of a biofuel. Just earlier this month we saw Brookfield invest over a billion dollars into one of these e fuel facilities.
I need to go check out when these worthies are. They just like in Texas and Louisiana. World They California, California.
A lot of the fuel is sold in California and a lot of the old refineries are being converted there, but they are being produced everywhere. It depends on where the feedstock is, so you can see a lot of feedstock in the Midwest, a lot of the productions coming out there. We're starting to see e fuels which are take green hydrogen. They need to be near cheap renewable energy, and so you'll see a lot of these fuels.
As efficient as carbon the regular fuel, because I don't want to be thirty five thousand feet in the air and then engine as reliable.
Yeah, thank you, Yes, it produces jet aspec fuel. There are questions if you had one hundred percent staff in your tank. Actually a lot of the fossil jet fuels have some aromatics that end up in the jet fuel stream and that actually helps with seals in the engines. So they're testing that out, but nobody we don't have the quantities produced that you're anywhere near one hundred percent these days, and in general you could think of it as exactly the same as jet fuel.
Our thanks to Anna Davies, b n EF, head of Renewables Fuels.
Coming up, we look at Bloomberg Intelligence's list of ten needs to watch in the fourth quarter.
You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two thousand companies and one hundred and thirty industries. Can access Bloomberg Intelligence via Bigo on the terminal.
Now, Paul Sweeney and am Alex Steel, and this is Bloomberg.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa Play Bloomberg eleven thirty.
Back in January, Bloomberg Intelligence came up with a list of fifty companies to watch in twenty twenty four, and now they're back with a list of ten companies to watch specifically in the fourth quarter.
This is based on scenarios from our bi analysts who sorted through the barrel to find the good apples across sectors and regions.
For more. We are joined by Tim Craig, head, Bloomberg Intelligence Global Chief Content Officer.
We first asked Tim to talk about the companies on the list.
Just to put context. This list of ten are all focus ideas of ours, so companies where we have a high conviction view that we think is different from what the market thinks, and there's catalyst ahead. True Leave is a marijuana grower and a distributor. They have stores. Seventy percent of their stores are in Florida, and Florida has on the referendum this November, the potential for legalization for recreational use. It would be a big deal for truely that this were to come through.
Yeah, maybe Florida a huge market. And you know what I recognize when we went over to Hireland, Coupic Sco. They don't do the gummy thing over there. They don't have the weed thing They're gonna get on board there.
They just got answer down.
Maybe that's what they don't.
Really need to I'll on that they just go to New York and then they come back to.
Exact Ireland exactly. Anti Sports talk to us about that because I feel like I know they're an Asian company, so I'm assuming this has a China call to it.
It does with an interesting twist. Anta is a is a sportswear company. They have a number of brands. I think when I've been on your show before, you may have seen that I've had an Arctics best one.
Is like an extreme biker, climber hiker. All the stuff that I.
Just have good for you. I got nothing on that.
But no Arctics is owned by Anta. But the reason why Anta is on here is twofold number one. Do have a lot of things going on from the standpoint of driving their business with various brands and the Olympics playthrough will get results when they report next in terms of how good it's been the China national team or anti sports kit. But it's also the case you've seen lots of news about Adidas and Nike and how they're
trying to get their inventory under control. That's making pricing better for sports where generally, and we think that that's playing through into anti sports margins as a corollary.
That's interesting when you compare it to like sing I understand that they do different things, but still you've also on here. So this is basically straight up railroad stock. Why do you guys like this one?
Well, there's two things here. If you were to look at a three year, five year type chart, you would see that this company has gone through some problems. They had a big right off and problem that was announced a year or so ago. Stock had collapsed, that's been settled and they're on the right track. No pun intended
at this point. But importantly, there is a new European union wide signaling system that's coming into place that is meant to be reducing a lot of complication between different countries and whatnot, and it's an Alstom system and in general the train businesses is running pretty well. We think they're on a road for recovery.
One of the bigger market cap names on your list is Saudi National Bank, and I'll start with I know nothing about Saudi National Bank, but it's fifty seven billion market cap. What's the story there?
Yeah, you know, it's really interesting. And this is true for Saudi National Bank. It's also true for some others in the country. It's running contra to what most banks are experiencing. I think there's been lots of news and coverage and certainly we've written about the pressure coming ahead for most banks with their net interest margins. As interest rates start to decline, you know, their loan pricing comes down, and you know that's not great for margins. Saudi National
Bank isn't is an interesting case. We're given the nature of how their loans reprice versus their deposits repricing. They actually stand to see over the course of the next six to twelve months, then interest margin growth and expansion, and so it's running counter given just simply the nature of their asset and liability mix to normal bank profitability in the aren't cycle we're in. So it's a really unusual story.
Okay, we got like a minute, can you do for solar for me? Because that's for me, that's a TVD based on what happens with the Inflation Reduction Act here in the US, But you tell.
Me it absolutely is. I mean, we all know that the election coming up is going to have a lot of implications for what happens from energy transition related spending and whatnot. That said, we're still going to see solar panels as a renewable energy source continued to grow. These guys are in the catbird seat, so to speak, from the standpoint of they have a dominant position in the US.
They've got good technology. Even though the Chinese producers are bigger and lower cost with arguably better technology, there's way too many restrictions for China product to come into the States, and so for solar is not you wouldn't say it's in a monopoly position, but it's a very advantaged position. And almost regardless of what happens with the IRA, we think that they've got wind that they're back for better order growth going ahead.
All right, thanks to Tim craig Head, Bloomberg Intelligence Research of Global Chief Content Officer.
We moved next to news on Honeywell International. This week, we heard that Honeywell plans to spin off its advanced materials division.
It's the latest move by the industrial conglomerate to reshape its portfolio, and this comes as there have been calls for the company to spin off or trium it's holdings for more.
We were joined by Karen Uberlhart, Bloomberg Intelligence Senior industrials Analysts.
We first asked Karen if this potential spinoff is a big enough catalyst for Honeywell.
It's big enough to count.
I don't think it's big enough to settle the question of should they have more focus.
They've tried on the M and A side, which.
They were criticized for not doing any deals despite sitting on ten to twelve billion dollars in cash for a very long time. They've done four deals under the new CEO, one of them rather large. It's not moving the needle because acquisitions take time to tell you if they're successful or not right. But they haven't done anything on the divestitor side since twenty sixteen, when they did the two spinoffs, so they were looking to do something. I thought they'd
do something, but it had to be big. Is this big enough?
No?
But he did signal at a conference recently that if they didn't do something material by the end of this year, he'd be disappointed, so we knew something was coming. I don't know if this is enough.
So, I mean, Alex, no one on Global Wall Street has more experience with divestitures than Karen Haart. She's been covering these industrial companies for decades and they're always buying something or selling something. And the best example is Ge. And it seems like Ge has gotten to a spot where the market likes where they are and how they're positioned. Is Honeywell, Karen trying to do something like Ge.
To be fair, g you took a real long degeneration.
I said, yeah, I said, don't bet against Larry.
But it took a very long time for it to work.
So I don't think so it's Honeywell in the same kind of strategy.
You know, they have very good businesses.
They were never in the trouble that Ge was in, and you know, and they're one of the more most profitable companies in the group. The problem is there's a lack of catalyst number one and number two. As we know, these things go in waves and people want focus now. You know, I've said over the cycles, they break them all up, they put them back together, they break them
all up. We're in the break them all up now And a lot of the companies have really paired down, like the ah VAT companies for example.
So people want something big.
And the other point I'd say is they have you know, mediocre organic growth for a while now, but they always delivered on earnings. They missed for the first time in the last quarter and that' stuck.
Blew up because they don't miss. So you know, it's it's been an underperformer now on any time period.
You want to look one, three, five years and he's frustrated.
You can tell. But I think there has to be something more.
What is honeywell now? So if I was to go to you and be like, what did they do?
Won't be your answer.
The biggest business is aerospace, very well positioned. They're very good business, a good long term outlook. Building automation is a second one. It's the rest of the three are smaller, and that's a decent business. I don't think it's a particularly high grower, and they did a big acquisition there. The other third big business is automation, and it's factorial industrial automation, process automation, it's warehouse automation, which has not worked out that well so far, and a few other
bits and pieces. And the third piece is what remains of the chemical business, which is a catalyst business called up So, Karen, I know.
From reading your research and talking to over the years, you got to get the right CEO in there to really get things done because you start big, big lumbering companies. The CEO now, Vimal Kopor, has been in the role for a little more than a year, but he's been at Honeywell for a long time. What's the street feeling about himc the guy who, like Larry Colp, can get things done.
I think people were surprised but took the change positively because people have been frustrated that they sat on so much cash and probably didn't and didn't do anything with it, and people wanted bigger changes, so he took the first step with all the acquisitions. I think operationally, you know, he does.
A great job.
That's been the Honeywell story I think we'll have to wait and see what else he does in the portfolio change. This is a decent size move, but it's only ten percent of the company, so I'd say wait and see on that.
When we've talked in the past, it's really been that warehouse part of the business because it's so very, very very early cyclical, and that's been causing a lot of short term pain for that business. Have we hit a trough, like is there a recovery in sight? Or to buy the CEO some time.
It sounds like by the order pattern that things have troughed. You know, there was an overbuilding warehouses as we know right, and then it collapsed and they only got one or two good years out of that deal before it collapsed.
They've structurally fixed it. The margins are not bad.
It looks like it's troughed, but I don't think we're expecting a really big rebound. But one thing I will say that the CEO said, you know, it's four percent of the company now only because its trunk so much, But it's we get spent a lot more time than four percent of the time.
That's because it's still not fixed. It needs volume.
I thought that was when they might think about doing something with but again, not enough to move the needle. And I'm not sure they're convinced it doesn't have a good long term story. We're convinced, I think in generally.
I think about the dividend here, Karen, dividend two point two percent dividend yield. I got, you know, six seven billion dollars for free cash flow every year. Should they be paying more of a dividend or do you think most industries are happy with a two point two percent divid yield.
I think that's okay.
I think they'd rather have them use the cash in a more active way, like either more buybacks or more deals. So the question is will they do anything with it when they get rid of this business, which will dilute earnings. I think they'll probably take the route of buyback and grow into the dividend. It's not going to be like it was with Emerson years ago and the dividend was way too large after they sold a third of the company.
I think they'll keep the dividend. I don't know that they'll grow it all right.
Thanks to Karen Uberheart, Bloomberg Intelligence Senior Industries analyst, this is.
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