Honeywell, the industrial conglomerate known for its aerospace prowess and steady performance, just might be sitting on a hidden gem. While analysts pore over the latest earnings transcript, focusing on the predictable strength of aerospace and the looming recovery of short-cycle businesses, a more subtle, yet potent, story is unfolding.

The company's warehouse automation business, Intelligrated, has been languishing in the doldrums. As Greg Lewis, Honeywell's CFO, admitted, projects "remain around trough levels as investments in warehouse automation continue to be subdued." However, beneath the surface, a powerful transformation is brewing.

Vimal Kapur, Honeywell's CEO, dropped a bombshell in the Q4 2023 earnings call: despite top-line pressure, he expects Intelligrated to contribute to EPS accretion in 2024. This seemingly contradictory statement suggests a calculated strategy to reshape the business, turning a perceived weakness into a potent driver of profitability.

Kapur's confidence stems from two key strategic moves. First, Honeywell has aggressively built out Intelligrated's aftermarket services business. While new project orders remain sluggish, the installed base continues to hum along, generating recurring revenue and lucrative service contracts. In fact, as Kapur revealed, the aftermarket now represents over $500 million in revenue, and is expected to grow at double-digit rates in 2024.

The second strategic move involves rigorous cost optimization within the warehouse automation business. Kapur emphasized the focus on streamlining the supply chain, effectively right-sizing the cost base to align with the current demand environment. This proactive approach ensures that Intelligrated can remain profitable even with subdued project order intake, setting the stage for a powerful rebound once capital spending recovers.

The numbers tell a compelling story. While Intelligrated's project business exited 2023 down a staggering 50%, the expectation is for a flattish exit rate in 2024. Coupled with double-digit aftermarket growth, this suggests a potential 10%-plus increase in overall warehouse automation revenue, even with a conservative project recovery scenario.

Furthermore, consider this: if Intelligrated can achieve margin expansion, as Kapur predicts, despite flattish top-line performance, the impact on earnings could be substantial. Assuming a conservative 50 basis point margin improvement on a $1 billion revenue base, that translates into a $5 million profit boost. This incremental profitability, fueled by a "boring" business that most analysts are writing off, could contribute significantly to Honeywell's overall earnings growth in 2024 and beyond.

This strategic pivot within Intelligrated also underscores a broader theme emerging at Honeywell: a focus on building recurring revenue streams and leveraging the power of the installed base. This trend is evident not only in the warehouse automation business but also in areas like process solutions and building automation.

This subtle, yet powerful, shift could have profound implications for Honeywell's future growth trajectory. While the aerospace recovery remains the headline story, the transformation of Intelligrated into a lean, recurring-revenue driven business, could unleash a wave of unexpected profitability. This hidden gem, overlooked by the Wall Street spotlight, might just be the key to unlocking double-digit earnings growth for Honeywell in the years to come.

Hypothetical Intelligrated Revenue Growth in 2024

The following chart illustrates a hypothetical scenario for Intelligrated's revenue growth in 2024, assuming flat project revenue and double-digit aftermarket growth.

"Hypothesis & Numbers: - Intelligrated Revenue: Assuming flat project revenue and double-digit aftermarket growth, we could see a 10% or greater revenue increase in 2024. - Margin Expansion: A conservative estimate of 50 basis points margin expansion on a $1 billion revenue base translates to a $5 million profit boost. - EPS Accretion: The incremental profitability from Intelligrated, coupled with growth in other segments, could significantly contribute to exceeding the midpoint of Honeywell's 7% to 10% EPS growth guidance."

"Fun Fact: Did you know that Honeywell's technology played a crucial role in the Apollo 11 moon landing? Their inertial navigation systems guided the spacecraft, helping to make "one small step for man, one giant leap for mankind" a reality. Today, Honeywell continues to push the boundaries of technology, from quantum computing to sustainable solutions, solidifying its position as an industrial powerhouse for the future."