Industrial giant Honeywell International wants to morph into a digital-software-industrial organization. It took another step down that path Thursday.
That's when the company kicked off its annual Honeywell Connected Enterprise annual customer and partner summit.
That's a mouthful. Honeywell Connected Enterprise, or HCE, can be thought of Honeywell's software division . And the meeting, in Orlanda, Fla., can be thought of similar to developer summits that are more common in the tech industry. In Orlando, Honeywell (ticker: HON) will launch some 20 applications for its data analysis platform called Honeywell Forge.
HCE CEO Kevin Dehoff has a favorite application coming. "I have a project, I think it's my baby," said Dehoff.
He took over HCE in May after Que Dallara left Honeywell for Medtronic (MDT). Before HCE, Dehoff ran Honeywell's Productivity Solutions & Services. There is a lot of warehouse solutions offered in that business. In that role, he saw an opportunity to boost worker productivity by providing software-based applications that help workers perform their tasks. "One of the early beta releases [at the meeting] will be our worker intelligence application," he said.
The application helps warehouse workers and management eliminate waste. "A worker in a warehouse gets paid on making their plan … it's money in their pocket," added Dehoff.
That's only one example. Honeywell also announced a performance analytics for industrial asset performance. That is designed to enable higher asset reliability and energy efficiency through real-time monitoring and predictive models.
"One of the hardest business sectors to modernize has been industrials," said Patrick Moorhead, principal analyst at Moor Insight. There is still a lot of hardware needed to run energy and manufacturing enterprises as well as buildings and distribution centers. Moorhead said HCE merges all the sensors and control systems with software to lower costs and enable "as a service" business models.
Software as a service, or SaaS, has been a theme for software investors for years. Honeywell is still early in developing a recurring revenue business. The size of Honeywell's recurring revenue wasn't disclosed. Honeywell is expected to generate about $35.5 billion in sales for all of 2023. Honeywell does disclose HCE's growth rate. It's been growing at double digits for years and is expected to grow at faster rates for the coming couple of years.
Moorhead estimated that SaaS-type revenue amounts to 10% of overall sales. Doug Henschen of Constellation Research estimated the HCE business is comparable to the size of software provider Dropbox (DBX). Its 2023 consensus sales estimate is $2.3 billion. Its market capitalization is about $7.5 billion.
A lot of industrial organizations are trying to digitize their products and make them smarter by adding more software. No one expects Honeywell, or its peers, to morph all the way into something that resembles SAP (SAP) or Salesforce (CRM).
Those two companies have gross profit margins in the range of 70%. Honeywell's gross margins are closer to 37%. Hardware will always matter in manufacturing. The expectation, and hope, for the industry is to develop new, higher margin, revenue streams over time.
The HCE meeting is another sign that Honeywell is well-placed to do that. It's a controls company with roots all the way back to residential thermostats. It doesn't make those anymore, but its products control thousands of warehouses, chemical plants and commercial buildings around the globe.
Honeywell stock has fallen about 2% this year, better than the roughly 22% and 13% comparable, respective declines of the S&P 500 and Dow Jones Industrial Average.
Shares are trading at about 22 times estimated 2023 earnings, a premium to the market multiple of about 16 times. Industrial stocks in the S&P 500 trade for about 17 times estimated 2023 earnings.