Investors may buy stocks for any number of reasons, but when it comes to Honeywell International (HON 0.39%), there's one reason in particular that looks like a good argument for adding it to your portfolio now. However, it might not be the one many investors expect as the conglomerate moves toward a breakup into three separate companies.

The case for buying Honeywell stock

The best way to put it is this: Honeywell stock is a good buy not for what the company is now, but for what it could become. This distinction speaks to the two highly complementary arguments for viewing the stock favorably.

• A breakup of Honeywell will result in a valuation expansion in its constituent parts, as the value of the sum of the parts is greater than it's being credited with as a single entity. The market will start pricing the newly independent businesses in line with their peers, thus eliminating the current "conglomerate discount."
• The breakup will result in improved earnings at the constituent companies. Hence, the stocks have upside potential even if their valuation multiples stay the same, and the constituent companies might have valuation expansion prospects because of the earnings growth.

The sum of the parts argument

The "sum of the parts" argument does not offer as strong a buy case as many might believe. As I've written about in more detail previously, Honeywell's aerospace and automation businesses do look undervalued compared to their peers -- but they also are not quite as strong as their peers. Honeywell Aerospace's position in business jet engines, avionics, auxiliary power units, and actuated systems is less powerful than GE Aerospace's dominant position in commercial airplane engines, for example.

Similarly, Honeywell Automation (which combines industrial automation with building automation businesses) competes with focused industrial/process automation/software players such as Rockwell Automation or Emerson Electric and focused building automation companies such as Johnson Controls. In fact, it wouldn't be surprising if a further split between the industrial and building automation business of Honeywell Automation occurred down the line.

Indeed, neither the market's reaction to Elliot Investment Management's call for a breakup in November nor the announcement of the breakup plan in early February ultimately did much for Honeywell's stock price.

HON data by YCharts.

As such, investors buying into Honeywell stock hoping that someone will wave a magic wand and the market will realize that the stock is materially undervalued on a sum-of-the-parts basis will likely be disappointed. With the advanced materials business already set for its spinoff by the end of this year or early 2026, the focus of investor attention should shift to the aerospace and automation businesses.

Honeywell Aerospace

Both Elliot and Honeywell's management have also made a far more powerful case: Honeywell's current business units will be able to grow more once they are standalone companies. This could lead to a significant price appreciation on earnings and valuation expansions.

As independent companies, the three also will be more focused and have access to capital comparable to their peers.

Image source: Getty Images.

That's likely to be a significant benefit for Honeywell Aerospace, given the premium the market applies to aerospace companies, and it could drive a more aggressive approach to mergers and acquisitions that has been lacking in recent years. Purely by way of example, aerospace-focused advanced composite materials company Hexcel looks like an excellent value and a good fit for Honeywell. Still, its $5.4 billion market cap appears out of reach. The conglomerate's significant acquisitions have been in its Honeywell Automation business -- the $4.95 billion purchase of Carrier's global access solutions business, and the $1.95 billion deal for Air Products' LNG process technology business.

Honeywell Automation

Honeywell Automation's industrial automation rivals such as Emerson Electric have re-engineered themselves into pure-play automation companies with strong positions in adjacent markets like industrial software and test and measurement automation through acquisitions. Meanwhile, Johnson Controls has restructured its building automation segment to exploit the burgeoning growth in commercial and industrial building automation and software.

A stock to buy

In sum, the reason to buy Honeywell stock is that the conglomerate has an opportunity to improve earnings by hiving off its segments into focused independent companies and investing in their niche markets. Both of the businesses it's spinning off (or, arguably, all three businesses, as industrial and building automation have little crossover) need focused investments, mainly because automation's software and digital elements are on an inexorable rise. Honeywell's aerospace businesses also arguably need investment.

The upside opportunity is significant, but it derives from the potential for earnings growth rather than on a sum-of-the-parts premise.