Sweet Deal For Honeywell
Carl Gutierrez, 04.09.08, 2:05 PM ET
Supply contracts don't normally make news, but Honeywell International's $23 billion deal with Embraer was too big to ignore.
After the market closed on Tuesday conglomerate Honeywell International (nyse: HON - news - people ), announced it won a $23 billion contract to supply its HTF7000 series of turbofan propulsion engines to Brazilian commercial jet maker Embraer (nyse: ERJ - news - people ).
"It's no question this is a good move for Honeywell," said Paul Nisbet, an aerospace analyst at JSA Research. "It should result in somewhere in the neighborhood of $1 billion a year in revenues, which is a 3% increase over current levels, so this is not something to be sneezed at." Nisbet added that in signing the deal Honeywell outfoxed Rolls Royce and Pratt & Whitney which undoubtedly were trying to get their engines in the Embraer planes.
Despite starting the day strong, shares of Honeywell were dragged down by Wall Street's tough day, trading up only 0.9%, or 52 cents, to $57.71, in early-afternoon trading, while Embraer shares actually fell 1.1%, or 49 cents, to $43.12.
Christopher Glynn, an analyst at Oppenheimer, said that the revenues should start flowing in 2011 and the contract has 20-to-25 years of life to it. He pointed out, though, that the far bigger piece of the deal comes from the after-market lift.
"The original equipment content is in the engine, but those engines will have to be services regularly," Glynn said.
Honeywell said the HTF7500-E features new technology which reduces emissions and helps improve fuel efficiency. The engines are earmarked for Embraer's new MSJ and MLJ business aircraft.
"It would be safe to assume that over the next 20 years or so there will be over 1,000 of these Embraer aircraft built because they're talking about 2,000 engines and they're twin engine aircraft," Nisbet noted.
The contract follows Honeywell's March win at Gulfstream valued at $3 billion, an Air Tran contract earlier this year valued at $1 billion and an Airbus A350 deal announced in the fourth quarter valued at $16 billion.
The Associated Press contributed to this article
