It's no secret that interest, and more importantly investment, in artificial intelligence (AI) is skyrocketing. This creates growth opportunities for companies and increases value for shareholders of companies with exposure. One such company is Diversified Industries. honeywell international (Hon 0.58%). It’s not just the users of AI that add value to AI solutions. The company also has a significant stake in a quantum computing business that management plans to monetize.
AI and high performance computing
The benefits of AI include the ability to automate tasks and improve outcomes through better predictive capabilities. Massive amounts of data can be processed and analyzed to improve outcomes for customers (or patients, in the case of healthcare). However, this requires high-performance computing to run properly.
That's why semiconductor foundries taiwan semiconductor has seen significant growth in its high-performance computing chips, which is one reason why company management expects its revenue to increase by more than 20% this year. That's why Honeywell's quantum computing business, Quantinuum, is attracting so much attention.
Quantum computing will enable AI to reach its full potential. This is a key reason why Honeywell combined its Honeywell Quantum Solutions (HQS) business with Cambridge Quantum Computing (CGQS) to form Quantinuum in 2021. Honeywell has invested nearly $300 million in Quantinuam since the deal was signed and owns about 54% of the company.
Honeywell CEO Bimal Kapur said on a recent earnings call that the estimated $5 billion valuation was due to a successful equity raise in January that “secured $300 million at a pre-money valuation of $5 billion.” I did,” he said. Mr. Kapur further said, “We are committed to charting a path to equity monetization within the next 18 months.”
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What it means for Honeywell shareholders
Simple math means Honeywell is at risk for $2.7 billion. The next question is whether that's enough to move the $128.6 billion market-cap company significantly. The answer is both “no” and “yes.”
On the other hand, that's a no, given that it's only 2% of Honeywell's market capitalization, and it's hard to argue whether monetizing Quantinum would make a big difference to the investment proposition for the stock. In other words, don't buy Honeywell solely because of its exposure to AI. On the one hand, this is a yes because it is symbolic of how the company can deliver value to shareholders in the future.
How Honeywell creates value for investors
Mr. Kapoor recently reiterated the company's strategic framework and long-term goals. The goal is to generate organic sales growth of 4% to 7% annually (100 basis points equals 1%), along with margin expansion of 40 basis points to 60 basis points, resulting in 6% to 10 basis points. of earnings per share (EPS). %.
The question is whether investors are prepared to pay 19.8 times expected 2024 earnings for a company that grows at this pace. If long-term earnings growth is closer to 6%, the answer is probably negative, but if Honeywell's growth rate is double digits or higher, it's a different story.
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However, the company has a route to get there. For example, Kapur believes Honeywell can achieve “double-digit adjusted EPS growth at the midpoint on a full-cycle basis” due to EPS increases from both “share buybacks and consistent” mergers and acquisitions. .
The second route, as outlined in our 2023 Investor Day presentation, is driven by the successful development of breakthrough initiatives that increase organic sales growth by 1% to 2%. will be done.
Honeywell's groundbreaking initiative
These include cloud-based software businesses, sustainable technology solutions (green hydrogen technology, carbon capture, renewable fuels), unmanned aircraft systems, urban air mobility (avionics and propulsion systems for air taxis and cargo drones), and Includes Quantinum.
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This type of initiative (created and funded by Honeywell) could add 1% to 2% to the company's core growth rate of 4% to 7%, and if the company's profit expansion plans go well, Honeywell could It's not hard to see how you can benefit from it. EPS will grow in double digits.
As such, Quantinuum's increasing value and the arrival of the AI boom demonstrate the value inherent in Honeywell's groundbreaking work and why investors want to invest in the company.
Lee Samaha has a position at Honeywell International. The Motley Fool owns a position in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
