Now, Honeywell better dig up a big deal.

Honeywell International (HON) - Get Report told investors on Wednesday, Feb. 28, that mergers and acquisitions are its top priority for 2018 as management expects it to be an active M&A year due to the overhaul of the U.S. tax system.

The Morris Plains, N.J.-based company, which is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust, held its annual investor conference on Wednesday, updating investors on guidance and strategies for the year ahead. While M&A appears to be at top of mind for management, investors also got an update on the company's planned spin-offs and guidance for this year and the long term.


Bolt-on acquisitions are at the forefront of Honeywell's M&A strategy this year, Chief Executive Darius Adamczyk said at the conference, noting that he reviews bolt-on deal ideas monthly. If no deals emerge, however, the company will instead look to repurchase shares.

"Management expects 2018 to be an active year for the M&A market due to the passage of the US tax reform," Deutsche Bank research analyst John Inch wrote in a note. "Management had expected to do more M&A transactions last year, but sellers' expectations were reportedly too high."

Adamczyk stressed to investors Wednesday that Honeywell will not overpay for any acquisition. The company will expand its M&A pipeline to include joint ventures, minority investments and partnerships to enhance growth possibilities.

The company says it has $21 billion in cash that's available to be spent over the next three years. Honeywell plans to bring back about $7 billion from overseas within the next 24 months.


As Honeywell look for companies to acquire, its efforts to spin off its Transportation Systems unit and the Homes and ADI Global Distribution business are progressing.

The Transportation unit spin-off is tracking ahead of schedule, management said, and will likely be completed at the end of the third quarter this year. The business unit had $3.1 billion in sales during 2017.

The Homes unit, which had $4.5 billion in sales last year, remains on schedule, targeting the end of 2018.

The company announced in October that it would be separately spinning off these two business units into two stand-alone, publicly-traded companies. The portfolio changes were a result of management's comprehensive portfolio review.

Activist investor Third Point LLC's Dan Loeb had been pushing the company to spin off its aerospace, and even though Honeywell did not follow Loeb's exact request, he was pleased that the board and management "chose to conduct a thorough portfolio review and agreed that Honeywell should narrow its business focus."

Between both sales, Honeywell is targeting a $3 billion cash dividend, "but [management] noted there are potential trade-offs between legacy liability payments from spins and the dividend payment back to HON (more liabilities with the spin means less of a dividend)."


The company, with a market capitalization of $115 billion, also reiterated its guidance for the year ahead and its long-term targets.

Honeywell expects first-quarter earnings to be between $1.87 to $1.93 per share and full-year earnings per share in the range of $7.75 to $8, excluding separation costs and any adjustments to the provisional charge related to tax legislation.

"Importantly, management emphasized the company's focus (or "obsession") towards FCF generation and working capital improvement," said Deutsche Bank's Inch.

Free cash flow is expected to be between $5.2 billion and $5.9 billion. Sales for the year are estimated to be between $41.8 billion and $42.5 billion, which would represent 2% to 4% organic growth. Long term, the company is targeting organic growth of 3% to 5%.

Shares of Honeywell dipped 1.86%, closing at $151.06.