HON

The $5 Billion AI Business You've Never Heard Of

It's no secret that interest and, more importantly, investment in artificial intelligence (AI) are booming. That creates growth opportunities for companies and enhances value for shareholders in companies with exposure. One such company is diversified industrial Honeywell International (NASDAQ: HON). It's not just a user of AI to add value to its solutions; it also has a significant stake in a quantum computing business that management plans to monetize.

AI and high-performance computing

AI's benefits include its ability to automate tasks and improve outcomes through better predictive capability. Vast amounts of data can be processed and analyzed to improve customer (or, in the case of the medical field, patient) outcomes. However, to do this properly, you need high-performance computing.

That's why semiconductor foundry Taiwan Semiconductor is seeing strong growth in its high-performance computing chip and part of why its management expects more than 20% revenue growth this year. It's also why Honeywell's quantum computing business, Quantinuum, attracts so much interest.

Quantum computing enables AI to reach its full potential. It is a crucial reason Honeywell combined its Honeywell Quantum Solutions (HQS) business with Cambridge Quantum Computing (CGQS) to create Quantinuum in 2021. Honeywell has invested nearly $300 million in Quantinuum since the deal was struck and owns about 54% of the company.

The $5 billion valuation estimate comes from a successful equity raise in January, "securing $300 million at a pre-money valuation of $5 billion," according to Honeywell CEO Vimal Kapur on a recent earnings call. Moreover, Kapur noted that "we are committed to demonstrating a path to monetization of our stake within the next 18 months."

A chip on a circuit board.

Image source: Getty Images.

What it means to Honeywell shareholders

Some simple math put Honeywell at a stake worth $2.7 billion. The next question is whether that's enough to move the needle for a company with a market cap of $128.6 billion. The answer is both "no" and "yes."

On the one hand, it's a "no" in that it only represents 2% of Honeywell's market cap, and it's hard to argue that monetizing Quantinuum will make a massive difference to the investment proposition for the stock. In other words, don't buy Honeywell just because of its AI exposure. On the other hand, it's a "yes" because it's symbolic of how the company can release value for shareholders in the future.

How Honeywell can generate value for investors

Kapur recently reiterated the company's strategic framework and long-term targets. The aim is to generate 4%-7% annual organic sales growth coupled with 40 basis points to 60 basis points of margin expansion (where 100 basis points equals 1%), resulting in earnings per share (EPS) growth of 6%-10%.

The question is whether investors are prepared to pay 19.8 times the estimated 2024 earnings for a company growing at that rate. If its long-term earnings growth rate is closer to 6%, the answer is probably negative, but it's a different story if Honeywell's growth rate is in double digits or above.

An investor surprised.

Image source: Getty Images.

That said, the company does have routes to get there. For example, Kapur believes "EPS accretion from both share buyback and consistent" mergers and acquisitions will enable Honeywell to get to "double-digit adjusted EPS growth at the midpoint on a through-cycle basis."

The second route comes from increasing the organic sales growth rate by 1%-2% through the successful development of its breakthrough initiatives, as outlined in its Investor Day presentation in 2023.

Honeywell's breakthrough initiatives

These include its cloud-based software businesses, sustainable technology solutions (green hydrogen technology, carbon capture, renewable fuels), unmanned aerial systems, urban air mobility (avionics and propulsion systems for air taxis and cargo drones), and Quantinuum.

An engineer at work.

Image source: Getty Images.

If these sorts of initiatives (created and funded by Honeywell) can add 1%-2% on top of the company's core 4%-7% growth rate and the company's margin expansion plans work out, it's not hard to see how Honeywell could get to double-digit EPS growth.

As such, the growing value of Quantinuum and the coming of the AI boom illustrate the value inherent in Honeywell's breakthrough initiatives and why investors might wish to invest in the company.

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Lee Samaha has positions in Honeywell International. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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