Picking the Winners of the Honeywell Breakup

In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributors Tyler Crowe, Matt Frankel, and Lou Whiteman discuss:

• Digital Realty buying data centers.
• Building materials industry consolidation.
• Keeping track of what assets went where at Honeywell.
• Recent successes (and failures) with spinoffs.
• Mailbag: When do covered call index ETFs work?

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.

A full transcript is below.

This podcast was recorded on June 30, 2026.

Tyler Crowe: We're talking match-ups and breakups today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe. Today, I'm joined by longtime Fool contributors Matt Frankel and Lou Whiteman. We just got to the end of the Honeywell breakup phase that's been going on for a year. We're going to dive deep into that today. Of course, we're also going to hit the mailbag like we always do.

But we wanted to start today with — it’s July 4th weekend coming up, and apparently, Wall Street bankers want to clear their plates before the July 4th weekend because there's been a ton of deals that have happened in the last couple of days. Yesterday, Jon Quast, host and company, they covered the Comcast split and the Rocket Lab acquisition. Matt, I think you were part of that discussion there. Since then, we've seen even more deals come through. I've read four of them within the past 24 hours, and what I want to do today is we're going to go through all four of them, and then I want you guys to tell me which one of these do you actually like the most? We had Digital Realty buying data centers from Blackstone for about 3.5 billion. We have Carlisle Companies, a building supply company, doing an unsolicited bid for Owens Corning. Not done yet, but it looks like something's going to happen. You've got a materials company, Martin Marietta Minerals, buying a limestone supplier for 13.5 billion, and then ON Semiconductor is buying Synaptics for about $7 billion. Matt, I feel like somebody who loves REITs is going to go in a certain direction here, am I right?

Matt Frankel: I like playing the AI boom with stocks that I understand, the picks and shovels plays, the infrastructure plays like Data Center REITs. Digital Realty has been probably one of the top two or three longest-running dividend stocks in my portfolio. The deal is interesting to me. The stock is down 5% after the deal. The company is purchasing Blackstone's roughly 2/3 interest when you combine all of them in three data centers in Northern Virginia for $3.5 billion. One point two billion is coming in cash, the other 2.3 billion Digital Realty is issuing new shares. They're going to need about $1.4 billion of additional capex to complete the development of these. None of them are occupied or operational yet. Digital Realty is assuming some debt as part of the deal as well. They were already the minority owner of these three properties, just to be clear, they're just buying out Blackstone's majority stake. All three of them are already 100% leased to hyperscalers on 15-year deals with 3.6% annual rent escalators. It should help the company more than keep up with inflation when it comes to their rent. Two of them are supposed to be occupied and stabilized in the first half of next year, the third in the first half of 2028.

Tyler Crowe: Matt, you're making a pretty compelling case here, but the market doesn't seem to agree because the stock's down about 5% as we're recording. Why do you think the market may be a little less as on board with this idea as you are?

Matt Frankel: It's a good question. There are a few different reasons why. For one, Digital Realty says this is going to be a creative to FFO, which is Funds From Operations, the real estate version of earnings. But not until these properties are fully occupied and stabilized, which won't happen for a while. In the near term, it's probably going to hurt the earnings numbers. Plus, as I mentioned, they're selling $2.3 billion of new stock, and not only that, but Blackstone is selling $2.3 billion of its own Digital Realty stake. It's a dilutive deal. You're going to see a lot of stock on the hit the market at the same time. The FFO benefit is delayed. It's a fair price. It's a cap rate of 6.5%. In real estate, that's OK. It's a fair price. It's not a bargain for top-quality assets. Like I said, it's going to hurt the numbers in the near term. It's not a perfect deal, but long term, I like the strategy here.

Lou Whiteman: Funny, I'll take the other side of that trade. The goal of private equity is to be ruthlessly unsentimental, to buy low and sell high. For Blackstone, they're cashing out on an asset with massive continuing capex at a premium. I get it for Digital Realty. I'm not saying it's going to be a terrible deal for them, but I'd rather be sitting on Blackstone's side, and I do think that this is what private equity does well. But, I don't want to be boring and just focus on one deal, so let's broaden it a bit.

Tyler, Carlisle's bid for Owens Corning and then the Martin Marietta deal, too, they both intrigue me because they suggest that there are management teams out there who think it is time to be greedy when others are fearful. There's been a ton of headwinds in construction, especially on the residential side. We'll see they might be too early here, but the animal spirits in construction/residential construction, I feel like as an investor, even if I don't want to invest in those companies, it's a data point I should pay attention to that these management teams feel like it's time to stick their necks out.

Tyler Crowe: This certainly isn't the first time we've been hearing this consolidation of the building products space going on in the past couple of years. I feel like this has been a continuing trend in a slow market, whether that’s to grow the top line now while everything’s weak, or to your point of seeing the bottom, one of the companies that we like to discuss here, or at least the man behind a lot of companies, Brad Jacobs. He has his company, QXO, which is basically a building products roll-up company. It recently acquired TopBuild, which was an installation building products company. There is a lot of consolidation going on here, and it's an interesting side note to me because a lot of these companies have been for much of the 2010s into the 2020. There were good-quality companies doing really well that have hit the skids. It's going to be fascinating to see when renovation, new build cycle starts again with these beefed-up companies. Whether or not these acquisitions made them better or they just made them bigger. Because sometimes acquisitions can go both ways.

Lou Whiteman: We're still too early, but how too early are we here is, and the management's wherewithal to get things done. That's the interesting question. We'll just take from this and learn as they do.

Tyler Crowe: Not to leave on semi and Synaptics out of the conversation too much here. This is a company where on semi, I don't want to be too diminutive when I say this, but they're the dumb chips when we think of what we use semiconductors for. These are the chips that you see a lot of automotive companies, and anyone who is translating, like electronic signals to physical motion, them, companies like NXP Semiconductors, companies like that are doing a lot of this. This Synaptic deal, at least in their words, is like combining a lot of machine learning, AI inference, a lot of that. The technology, the platform for which a lot of on semi wants their new chips to be running so that they can start implementing this into making I'm going, they're dancing around it, but it's basically a path towards robotics. At the current price, it seems to make sense. But again we've been talking about chips as this hypergrowth area, but the physical motion actuator, again, a diminutive term, the dumb chips have not been exactly the hot thing, like we've seen with a lot of the other parts of the business. Coming up after the break, we want to break down the Honeywell and all of the associated parts that it is now is. [MUSIC]

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Tyler Crowe: It's been about a year for Honeywell International to complete what has been a rather stellar portfolio transformation because this was a large conglomerate that has basically divided up. I will say four, but I think if we were to back up even further, we could go five, six, seven, companies over the past 10 years as to what Honeywell has done. But this week was the end of the line here where we saw the biggest breakup and I think where management says is going to stop. We've got the Legacy Honeywell, which is going to trade with the old ticker H-O-N. We've got Honeywell Aerospace with ticker H-O-N-A. Then we've also got Solstice Advanced Materials. This actually was spun out, I believe back in November of last year trading on the Ticker S-O-L-S. Then I'm going to say this wrong, Quantinuum or Quantinuum, with two u's. The ticker is QNT and this was like an IPO that Honeywell owned. It was like their quantum computing division. I know I gave a little bit of what they did, but Matt, can you give me more of a breakdown of what all of these companies are going to be doing now that they're on their own and away from the Honeywell corporate blanket?

Matt Frankel: Well, I'm going to refer to that last one as Quantinuum. Lou is going to refer to it as Quantiniuum, and between the two of us, one of us will be right.

Lou Whiteman: Quantiniuum just sounds so much cooler, I'm sorry.

Matt Frankel: It does. I think I'm the right one, but yours is the cooler one. Here's a quick round-up just a little bit beyond what Tyler just said. As you mentioned, Honeywell itself is the industrial automation and process automation company. Out of the two that just spun off, Honeywell Aerospace being the other one, it's actually the smaller by revenue. Honeywell Aerospace provides power units, avionics, mechanical systems, parts, services. It is now one of the largest pure-play aerospace suppliers that is publicly traded in the world. That's significant. You'll see why later in the discussion.

Solstice Advanced Materials, Tyler's correct, it spun off in October of last year, and it's the specialty materials parts of the business. They make a specialized refrigerant, for example. Quantinuum is an interesting one. That was technically an IPO, not a spinoff, and it's still majority owned by Honeywell. I think Honeywell and one of its other investors own a combined, I think, 82% stake in the business. This is the full-stack quantum computing business. It is a pre-revenue company, like any quantum computing pure play is. Their goal is to develop both hardware and software that powers the next wave of computing, which is quantum computing, which, at the most optimistic timetable, will be a thing in 2030ish.

Tyler Crowe: This was obviously a lot of different parts here, and there is always the debate of be separate, be together. I feel like we've been having that discussion for, who knows how long when it comes to business. Lou, make the case, like, why were they doing this now or what was the case for any of these even being together in the first place?

Lou Whiteman: It's funny. You can go back to the 1950s in terms of just these cycles of coming together and breaking apart. But, where we were to get to hear, Honeywell stock, first of all, has done nothing this decade. It wasn't a great performer before then, just flat. Which I would argue does not reflect the quality of the assets in the portfolio. Now, some of this was management either being bold or being silly. They loaded up with some debt to cobble together these assets, but a lot of it arguably is the so-called conglomerate discount. Conglomerates are companies that are basically in a bunch of different industries. Think of it as a lot of businesses under one roof. There's some advantages to this structure, but ultimately each business has its own capital needs, its own M&A strategy. They operate in different cycles and the management team for each has to basically go to the parent, go to mom and dad to ask permission every time they want to do something. There's a constant battle for who gets the allowance.

The theory in this breakup is freed from that extra layer of management, each operating team can make decisions that are in the best interest of their unit. The Aerospace business can use all of the cash they're making to invest in the business or maybe pay a dividend, something like that, instead of sending their cash upstairs for it to be distributed to shareholders or funneled to other parts of the business. In this case, Honeywell Aerospace is a well-run provider of cabin electronics and other systems. But it doesn't really have a lot of room for margin expansion or maybe not even growth. It's already the market leader where it is. For this management team, maybe it's a capital allocation story, buybacks, bolt-on deals. That's what's going to drive appreciation. The automation business much earlier in its life cycle, much more just investing in what they do. They're likely to use their cash internally. These are just two management teams free to do what is best for their business instead of listening to what the parent needs.

Tyler Crowe: It's not just Honeywell that has been going through this, come together, break apart cycle. Over the past I want to say 6-10 years, you could argue iconic names of industrial conglomerates basically do these breakups. We had GE, General Electric, was a gold standard of what a company should be, and all of the disciples that Jack Welch created, and now all of a sudden, it's created into three different companies. Now we've got GE Aerospace, GE Vernova, and GE HealthCare Technologies. Interestingly enough, a lot of these companies that go through these spin-offs have gone through pretty disparate returns as a result. HealthCare Technologies was supposed to be the crown jewels inserted cash generation. While since this breakup, Aerospace and Vernova have been crushing it while HealthCare hasn't.

You had United Technologies and Raytheon coming together, and then they split back up into RTX, Carrier, or Otis. Same thing. Everyone thought like, this RTX Avionics defense business is going to be mega grower, Otis is going to be this high return business. We don't know what to do with Carrier. Carrier ends up being the best performer of the group. Last one, too, Dow, DuPont, when they merged together and did a split, consolidating and deconsolidate everyone thought like this agricultural business, which is called Corteva was going to be the worst performer. Then all of a sudden, we're several years after the split. Well, you know it, Dow stock is actually down since Dow Chemical, it's just called Dow Inc now, is actually down since the split and Corteva is the best performer.

What I'm getting at here is that sometimes the things that we think are going to be the great performers of these split-ups isn't necessarily the case. What I'm going to do is with all of that in mind, I want you guys to put a little bit of a predictions hat on. I’m not going to say that Honeywell’s all of their businesses are going to follow this pattern that we saw with GE, UTX, DowDupont, but recent examples. Of these spawn of Honeywell that are remaining, which one do you see most likely to be the carrier or the Vernova of the split that's going to do incredibly well, the one that's maybe going to be the GE Healthcare or the Dow of this group?

Lou Whiteman: Full disclosure, I bought Honeywell ahead of a split because I wanted to own Honeywell and Honeywell Aerospace. For the long term, I like both of those businesses. But as I said before, arguably, you're not going to see the same surge, say, after the GE breakup just because of where we are in the cycle for these businesses. One of them it's already played out some and one of them is still to come. I like them over five years. I think better than I like them over. As for the run and the litter tier, I am going to cheat and I'm going to lean on technicality because as you mentioned at the top, this is not Honeywell's first three-way split. In 2018, they spun out their auto business and their thermostat business, the old Honeywell, what we all think of when we think of Honeywell. That residential control business, Resideo Technologies, was the one that I would have avoided back then. It's the one I'm avoiding today. Honestly, the auto business Garrett Motion was to be avoided until it went through bankruptcy, but it's funny. I think the first time Honeywell took out the I don't want to say take out the trash, but took the underperformers, and this time, what was left was just a desirable group. I think what's left is pretty strong, but the ones back from 2018 came out with a lot of wards.

Matt Frankel: I would even add the Comcast and NBC Universal deal. We saw the other day to the deconglomerate trend. There have been quite a few. You're right. Maybe Berkshire Hathaway's next. I know Lou would be a fan of that. Not as much as a dividend. Let's say it that way.

Lou Whiteman: The problem with doing that is that so many of the operating businesses inside Berkshire seem to have just rotted on the vine or aren't as competitive as they were when they were bought. I'd almost be afraid to it's almost like a puppy you can't let out into the wild, some of these businesses, unfortunately.

Tyler Crowe: There would be a lot of portfolio fixing if we were to actually start doing some Berkshire spinouts.

Matt Frankel: There could be a dozen of them in one company. In most cases, the motivation with most of that list you mentioned has been to separate a high-growth business or one with a lot of long-term tailwinds, like a defense spending trend or something like that from either capital-intensive or commoditized boring businesses. I see Honeywell Aerospace as being the GE Vernova of this. It's a pure play. It benefits from one a reliable revenue stream from its aftermarket business. It's the surge of global defense spending, companies like Boeing and Airbus are finally starting to normalize and work through their backlogs. That's a nice trend here. I mean, there have been several recent examples where companies in the aerospace and defense businesses get a premium multiple when they become pure plays. But on the other side, I'll go with Solstice as my GE Healthcare. It's a capital-intensive business. It started with about $1 billion of debt, and it's the most boring of the four. But it's impossible to classify quantum into either basket. With all the deconglomerate deals you mentioned, there weren't any speculative pre-revenue companies that were created. It's a binary outcome stock. It should be approached with caution and it could be either one of the two baskets that you mentioned.

Tyler Crowe: Something about Solstice. It sounds incredibly boring. It's like chemical solvents that we use for refrigerants and fluorinating uranium for nuclear power and a lot of that stuff. The more and more you squint at it, you're like, refrigerants, data centers. That makes a weird sense. Nuclear power growth being the only one that can fluorinate uranium as part of its conversion from yellowcake to actually enriched in ranium. That sounds interesting. There's part of me that wants to look at that and in part and be like, man, maybe this was just a problem child at Honeywell, but if you bring in a management team [MUSIC] that can really tie this together, there are a lot of long-term catalysts that could be behind this business over the long term. Each of us taking slightly different bets on what can do best at GE at Honeywell. Sorry, I'm so used to talking about breakups with GE. But it is Honeywell this time. Coming up after the break, we'll hit a listener question.

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Tyler Crowe: Everyone, quick reminder, as always, if you want to get your question answered on air, email us at podcasts@fool.com. That's podcasts with ans at fool.com. Through request as always, keep it Foolish, keep it short enough. We can read on air and please avoid trying to ask for any personalized advice. We have to keep it as impersonal as possible. Question today comes from Timothy Dombie, and it's related to a lot of new ETFs that we've been seeing. My question relates to the emergence of investment products that are income-generating. A few tickers, for example, S-P-Y-I, Q-Q-Q-I, C-H-P-Y, and B-T-C-I. These are all covered call strategy ETFs that try to track a index while also writing premiums or writing options on those to generate income. His question is, can you explain the purpose of these products? They appear to cap upside, provide little downside risk and provide a sold call mechanism. Is there a market scenario where these products actually make sense, Lou?

Lou Whiteman: Absolutely, especially for the issuer. For the buyer? I'm not so sure. I'm not a big fan, but look, there's a product for everyone. As listener notes, you are capping your upside in return for monthly income and not to be a Snetmt but to me, that's what rats are for. But look, my real issue here is these products is the fees. With SPYI and QQQI two of them they mentioned, you're paying a 0.68% expense ratio, which is really high. The Bitcoin ones, the specialized ones, are almost 1%. You're capping your upside, you're paying through the nose for basically an artificially generated income stream, not the net asset value on these things tend to be horrible. You better get that income stream. I come back to this all the time, but a lot of products on Wall Street were built to be sold, were built for the fees, not necessarily built because they really, really work for the buyer, and for me, at least, these fall into that category.

Matt Frankel: Technically, Lou, you could buy just the S&P 500 ETF and sell your own covered calls and avoid the fee entirely and generate some income that way.

Lou Whiteman: You could. That's a lot of work.

Matt Frankel: It is. That's what these people are being paid for. That's the point. Generally, these funds use covered calls that are just out of the money enough to produce those high single-digit return percentages, which is what most of them target, which also helps them retain some upside potential. The options, they provide income, they hedge a little bit against downside risk, but only somewhat. A sharp decline in the S&P 500 on one of these would more than offset any options premium they're collecting. They can be a decent option for retirees and other income-oriented investors. Maybe if I were 70, I would feel a little bit different, who want current income without having to sell the stocks that they own. There are some drawbacks. Lou correctly mentioned the fees, which are on the very high end for essentially index funds. There are also tax implications that you could run into as distributions that come from options premiums are generally not considered qualified dividends, so they can be considered ordinary income and hit your taxes more than you think. They can be a good way to generate income and benefit from volatility. During volatile times, the yields on these tend to rise significantly. But there are those big trade-offs to keep in mind. If anything, retirees can use them as part of an income bucket, like Lou said, that's what rates are for. You can create a whole income bucket, but not as a core income strategy.

Tyler Crowe: I want to ask one follow-up here, and it's to Tim's whole part of this is thinking about the market conditions. In what market conditions do these types of products work, and when are you going to take a bath on them? When people are thinking about these things, like what should they be looking out for, and when is it OK to perhaps own one of these things?

Matt Frankel: These work the best when you have an outlook for low volatility and are mildly bullish on the stock market. They perform best when the market or whatever the underlying asset is is slowly rising, not fast enough, so they're getting called out of positions or having the roll covered calls or anything like that. But that they're not going down and offsetting that options premium they're generating in the first place. If the S&P rises by 5% a year, these are golden. But it's really hard to predict when that's going to happen.

Lou Whiteman: Well, he said, you've capped your upside, so you don't want the market to have too much upside.

Tyler Crowe: Considering how well the market has done this year, it's almost like that might be taking on a little bit more risk than we may want.

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements or sponsored content provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to producer Dan Boyd and the rest of The Motley Fool team. For Lou, Matt, and myself, thanks for listening, and we'll chat again soon.

Lou Whiteman has positions in Berkshire Hathaway, Honeywell Technologies, and QXO. Matt Frankel, CFP® has positions in Berkshire Hathaway and Digital Realty Trust. Tyler Crowe has positions in Berkshire Hathaway and QXO. The Motley Fool has positions in and recommends Berkshire Hathaway, Blackstone, Carlisle Companies, Digital Realty Trust, GE Aerospace, GE HealthCare Technologies, GE Vernova, Honeywell Technologies, Owens Corning, QXO, RTX, and TopBuild. The Motley Fool recommends Comcast, ON Semiconductor, Otis Worldwide, and Synaptics. The Motley Fool has a disclosure policy.