Honeywell International (HON -1.23%) is finally breaking up. The rationale for the breakup makes perfect sense, and it could release a lot of value for investors. Still, does that make the stock a buy right now? Here's what you need to know before deciding on the stock.

Honeywell's breakup plans

Having previously announced the spinoff of its advanced materials business (due in late 2025 or early 2026), Honeywell's management decided to take the next step and separate its automation and aerospace businesses in the second half of 2026. As of yet, it's not clear which company will be the "RemainCo."

The breakup is pretty much along the lines that activist investors have been pushing for. Indeed, Elliott Investment Management pushed for change at Honeywell, arguing that a breakup could lead to a value per share between $321 (base case scenario) and $383 by the end of 2026 -- figures representing a 54% and an 84% increase on the price at the time of writing.

Elliott's case rests on believing that Honeywell's businesses would be better run as separate companies than within a conglomerate structure. In addition, Elliott's argument, echoed by many other investors, is that the market would grant the separate businesses higher valuation multiples. The prescription is simple: Break up the company, and the businesses will generate higher earnings, which would be valued more.

In short, the sum of the parts is greater than the whole.

Honeywell management's view

Naturally, Wall Street analysts were interested in asking about the subject, with Morgan Stanley's Chris Snyder inquiring as to the primary driver of the decision. CEO Vimal Kapur argued that it was a strategic decision based on the increasing divergence in the needs of aerospace and automation, with Honeywell Aerospace needing to work on capacity expansion and supply chain transformation and Honeywell Automation needing to focus on artificial intelligence, digital transformation, and energy security.

Kapur argued, "It's primarily driven by our conviction that there's more growth momentum and more value to create as a separate company." .

Image source: Getty Images.

Honeywell's valuation

Kapur's argument is fair enough, and it's what you might expect a CEO to say. After all, he's responsible for Honeywell's operational performance and can't control how the market values the stock. This is not to argue that CEOs don't keep a close eye on valuations; after all, generating shareholder value is key, and a stock's valuation does influence its ability to raise capital or sell equity.

Moreover, Honeywell named its "representative comparable companies" in its earnings presentation, and when you compare them with Honeywell, there appears to be a compelling case that Honeywell is undervalued.

First, here's how Honeywell stacks up against the named comparable aerospace companies in terms of forward enterprise value, or EV (market cap plus net debt), to earnings before interest, taxation, depreciation, and amortization (EBITDA).

HON EV to EBITDA (Forward) data by YCharts

Second, here's Honeywell with its named comparable automation companies.

HON EV to EBITDA (Forward) data by YCharts

Is Honeywell undervalued?

The answer is yes, but not as much as the charts suggest. For starters, Honeywell Aerospace's 26% segment margin is nowhere near TransDigm's near 53% EBITDA margin. Moreover, GE Aerospace has 74% of its revenue coming from commercial aerospace compared to 60% for Honeywell, and the former has several decades of lucrative aftermarket revenue coming from servicing its engines on commercial narrowbody and widebody planes. The same is true of RTX. Meanwhile, Honeywell Aerospace is more about avionics, propulsion systems, and business jet engines.

Turning to Honeywell Automation, a business that combines industrial and building automation, Rockwell is more of a comparable pure-play automation company, while Emerson Electric has made great strides to become one with investments in industrial software and automated testing and measurement. Johnson Controls is a pure-play building automation, software, and controls company. Honeywell Automation also has its warehouse automation and productivity solutions and services business, which reported 5% and 7% organic sales declines in the fourth quarter.

Image source: Getty Images.

What does it mean for investors?

All told the breakup makes sense, and the sum-of-the-parts argument does apply, but not by as much as many investors might think it will. There are reasons why Honeywell trades at a discount to many of its peers, and it's not just because of the conglomerate structure.

As such, investors must be patient and hope management can improve earnings over time. Honeywell looks like a decent value, but buying it depends on management's execution rather than the prospect of a valuation expansion resulting from a breakup.