Honeywell's crown jewel takes flight
Jason Spilkin August 2026
They say necessity is the mother of invention, but war has often been its accelerator. The Second World War unleashed an unprecedented wave of government spending on technology and engineering. When the fighting stopped, many of those innovations found a second life in the civilian world. Computers, nuclear power, space exploration and modern aviation all owe something to the wartime scramble for advantage.
Take computing as an example. Alan Turing's code-breaking work and machines, such as the Bombe and Colossus, helped lay the foundations for modern computing. The fission technology developed under the Manhattan Project to build the atomic bomb later became the basis for commercial nuclear power generation. Even Germany's V-2 rocket program lived on after the war, forming the basis of the Saturn V rocket that powered the Apollo missions to the Moon under the leadership of Wernher von Braun.
Civilian aviation was one of the biggest beneficiaries of this post-war technological dividend. Take the autopilot. It was not originally designed to make life easier for airline pilots. Wartime bombers needed to fly with extraordinary stability if they were to hit targets from high altitude, where even a slight deviation could throw a bomb hundreds of feet off course. This technology proved equally useful in deception campaigns, with Allied forces using remotely guided aircraft to create diversions from the main attack.
Jet propulsion also changed the balance of power in the skies. Germany's Messerschmitt jet fighters were significantly faster than their Allied counterparts. At the same time, American engineers were extracting greater performance from piston engines through turbocharging, allowing aircraft to fly farther, higher and faster. These advances helped make possible an aircraft such as the Enola Gay, a B-29 Superfortress bomber, designed to carry the atomic bomb across the Pacific and escape the blast after release. The best attributes of both technologies would later help shape the modern turbofan engine that powers airliners built by Boeing and Airbus today.
Companies such as Honeywell and United Technologies emerged as major aerospace players during the post-war acquisition boom of the 1960s. At the time, investors often rewarded diversified conglomerates with premium valuations. Management teams could use those lofty valuations to acquire lower-rated businesses, creating the appearance of immediate earnings growth and supporting still higher market multiples. Scale and synergy were the buzzwords of the day, although the benefits often proved harder to achieve in practice.
The environment changed during the 1970s. Rising inflation and interest rates punctured the conglomerate boom, while investors began to question whether sprawling collections of unrelated businesses were really worth more together than apart. While scale often made sense within an industry such as aerospace, managing disparate businesses became increasingly unwieldy and many promised synergies failed to materialise.
The 1980s ushered in an era of specialisation. Companies increasingly sought to unlock value by shedding non-core assets and refocusing management attention. Peter Lynch, one of the era's most successful investors, famously observed:
"Spinoffs have a terrific, terrific record in my lifetime. When companies get spun off, something seems to happen to them. They get better run, even though they were well run before."
Over the past several years, industrial giants such as United Technologies and General Electric have successfully broken themselves into more focused businesses.
Last year, following pressure from activist investors, Honeywell announced plans to separate its aerospace operations from its automation business. The logic was straightforward: two focused businesses would likely be easier to manage, easier to value and better positioned to pursue their own strategic priorities. In truth, Honeywell was not reinventing the wheel; it was following a playbook that had already worked successfully for several industry peers.
We purchased Honeywell shares in November last year because they appeared to trade at a discount to the sum of their parts. Last month, the separation was completed. We retained our aerospace holding, which we believe still offers meaningful re-rating potential, while exiting the automation business.
To us, aerospace always looked like the crown jewel. It is a highly profitable, long-cycle business protected by formidable barriers to entry. Aircraft components must first undergo rigorous certification before being installed on an aircraft program, often under sole- or dual-source arrangements. Suppliers may earn only modest margins during this original equipment ("OE") phase, which can span two decades or more. However, once aircraft enter service, a highly attractive aftermarket opportunity emerges through replacement parts, maintenance and upgrades that can last for decades.
In aerospace, incumbency is an enormously powerful advantage. Honeywell holds leading positions in many mission-critical systems that are deeply embedded across virtually every major commercial aerospace and defense program of the past century. Broadly speaking, its product suite includes:
- Avionics - the aircraft's brain and nervous system, encompassing navigation, communications, flight controls, displays, weather radar and collision-avoidance systems.
- Power systems - including the industry's largest portfolio of auxiliary power units ("APUs"), which provide power while aircraft are on the ground, start the main engines and serve as emergency backup systems in flight.
- Control systems - which manage motion, air pressure and thermal systems to help keep aircraft operating safely and efficiently.
Honeywell's approach is simple: develop technology once and deploy it across multiple platforms. Innovations originally developed for defense applications can often find their way into commercial aviation and vice versa. Meanwhile, the company's vast installed base creates a steady stream of opportunities for retrofits, maintenance and upgrades.
Few industries illustrate longevity quite like aerospace. Consider the B-52 Stratofortress, which first flew in 1952 yet remains in active service today and is expected to continue flying well into the middle of this century. Repeated upgrades have allowed the platform to remain relevant despite its age, demonstrating the enduring value of embedded aerospace technology.
Honeywell Aerospace has navigated wars, recessions, oil shocks and technological upheaval over more than a century. Today, the industry is more consolidated, barriers to entry remain formidable and the company's installed base is larger than ever. Predicting the next chapter is never easy, but Honeywell Aerospace appears to be starting from a position of considerable strength.
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