After you receive this Alert, we will be initiating a position in Honeywell (HON) , buying 200 shares at roughly $149.52. Following the trade, HON will represent 0.97% of the portfolio.
We are calling up HON from the bullpen and re-initiating a position following our early May exit here that came shortly after the first-quarter results here. We will be the first to admit that our sell timing was poor because we did not get a great exit price and the stock climbed higher about a month after our sale, but we note HON has underperformed the S&P 500 by about 6.5 percentage points over the period.
You can read Honeywell's second quarter earnings presentation here.
We know the backdrop in the Aerospace unit will be difficult for the foreseeable future because declines in air travel have impacted original equipment sales, but the aftermarket side should begin to improve in the third quarter as flight hours increase, and Defense & Space is still growing with the backlog up double digits as budgets have remained intact. We believe Honeywell's Aerospace is actually more diversified than what the market gives it credit for right now, as Defense & Space represents about 35% to 40% of the segment while the more challenged commercial OE is only about 20%.
In reality, Honeywell's Aerospace business will never be fully back until we see a medical solution to the virus. We are hopeful about the future and are willing to be patient here because we have seen several of the key vaccine developers provide optimistic progress updates in the past few weeks. We think HON will be one of the great names to own if and when news of a vaccine approval hits.
In Safety and Productivity Solutions (SPS), we are impressed with how Honeywell delivered 1% organic sales growth and managed to expand margins by 150 basis points year over year. This business enjoyed 20% growth in Intelligrated, which specializes in warehouse automation and is a great play on the e-commerce theme. Intelligrated also saw a 300% increase in orders and 140% growth in the backlog. In Safety, Honeywell is seeing strong demand for personal protective equipment in categories such as respiratory, head, eye, face, gloves and clothing categories. We think these gains can continue because the backlog is up triple digits and stockpiling has become a focus of government around the world. With the backlog at SPS at a record high and the segment facing easing comps in the back half of the year, we expect to see strong performance going forward.
In Honeywell Building Technologies (HBT), although this segment was impacted in the second quarter due to various purchase deferrals and project delays, organic sales should improve from -17% in Q2 to around -10% in Q3. But going forward, we see opportunities here for growth as demand for building efficiency solutions should be strong in the post-Covid world, and the recently announced partnership announcement with SAP (SAP) (read here) should open the door to additional opportunities.
In Performance Materials and Technologies (PMT), this business is levered to oil & gas (roughly one-third of sales) and while this may take some time to recover, PMT is also seeing double-digit growth in packaging, composites, and electronic materials. Additionally, Honeywell's Aclar healthcare business is developing vaccine packaging, and this will be an essential product when we see a Covid-19 vaccine hit the market.
The balance sheet is still the unquestioned leader in the industry with a leverage ratio below 1x and $15 billion worth of cash and short-term investments on the book. There is plenty of capacity and optionality here for future dividend increases as well as share repurchase and strategic M&A to support EPS growth. The current dividend yield sits at a solid 2.4%.
Speaking more about M&A, is a deal on the horizon? On the second-quarter earnings call the company introduced Emily McNeal as their new Senior Vice President, Corporate Development and Global Head of M&A. This hiring caught our attention because we like McNeal's prior deal-making experience, especially in e-commerce related transitions. During her time as a top executive at Walmart (WMT) , she was involved in the $3.3 billion jet.com acquisition that redefined the company's e-commerce strategy. Additionally, she oversaw Walmart's $16 billion investment in the Indian e-commerce company Flipkart, and later on she was named CFO. The time is right for Honeywell to explore M&A because the right deal will diversify the business away from challenged end markets like Aerospace and oil & gas. At the same time, an e-commerce-centric deal would deepen Honeywell's exposure to a secular growing industry that has increased in adoption because of Covid-19.
We are initiating the position with a price target of $180, reflecting roughly 23x consensus 2021 EPS. We think this higher multiple is justified when you consider the company's fortress balance sheet, strong free cash flow conversion, and robust growth prospects in a normalized environment. We see enough qualities in Honeywell to view it as more of a defensive name in the industrial sector, but we also think there is plenty of room for upside on strong earnings power in a post-Covid world.