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With cold temperatures arriving this past weekend in Rhode Island, I took a second to thank an inventor from the distant past. His name was Albert Butz, and his 1885 invention was called the damper flapper.
The damper flapper was an early version of a coal furnace thermostat. Over the years his thermostat was improved upon until thermostatic heating control became the standard for regulating temperature.
It was also the key innovation that propelled a small company’s growth through the early 1900s. That company was the Minneapolis-Honeywell Regulator Company, which is known today as simply Honeywell (NYSE:HON).
Even though Honeywell has since grown into a $75 billion multinational industrial technology company, the thermostat is still what people know best about the company. Its T87 “The Round” thermostat has been a key element of home heating systems for over 50 years.
And they’re still being sold today. In fact, Honeywell owns the thermostat market with 39% market share.
The company has a new wave of technologies that are now creating truly connected homes. And while Honeywell’s diversified business means it’s by no means a pure play on this trend, it’s still one of the best large-cap ways to gain exposure.
That’s especially true given its latest iteration of the thermostat. Dubbed “the Lyric,” Honeywell’s new smart thermostat shows that the company is stepping up its game and is taking demand for smart home appliances seriously.
Honeywell obviously makes more than just thermostats. While home heating and appliances are a significant part of its business, checking in at 23% of revenues, Honeywell has significant exposure to other massive industries beyond housing, from aerospace to security.
Behind each of these industries are long-term growth trends. This is why Honeywell is such a durable investment.
Because of its size most investors don’t think of Honeywell as a growth company. But operational and strategic initiatives are boosting Honeywell’s profit margins so that earnings are growing far faster than revenues.
Looking forward, I expect Honeywell to keep growing revenue at 4% to 5% annually and EPS in the 10% to 12% range. And I think sales of connected home products, like the Lyric, can add upside potential.
The connected home is a gradual trend that has been developing for years, but it is starting to accelerate as options go up and prices come down. People don’t swap out their home thermostats, locks, lights and large appliances overnight – there’s no need to.
But when they do need to be replaced, the added convenience and functionality of a smart device is compelling. I need a new thermostat at our second home and I’ll buy a smart one from Honeywell before the end of the year.
Honeywell rallied 14% from its October low after it reported Q3 results that beat estimates and raised guidance for the full year. And a recent 15% hike to its dividend (from $1.80 to $2.07) is a nice bonus for long-term shareholders.
Buy it for the dividend, the stability, or the likelihood that the stock will continue to outperform the market over the next decade. Regardless of the reason, Honeywell should be in any growth investor’s portfolio.
For me, the reason to own it right now is because I’m sitting in comfort even though it’s below 40 degrees outside . . . and because I fully expect Honeywell to completely integrate connected home technology into everything it makes.
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