Honeywell and the Quantum Computing Revolution

Honeywell is a huge industrial conglomerate that has been a legacy manufacturing company for several decades now. Many of you know what the company is, but you probably also know them vaguely compared to some of their other industrial competitors such as General Electric. Honeywell is a huge defense contractor and a manufacturer of productivity and building solutions such as thermostats, security systems, and air purifiers. Honeywell’s aerospace division manufactures engines and provides integrated avionics solutions along with them. Honeywell also manufactures automobile parts such as turbochargers and electricity solutions. On top of that, they provide the software necessary for a lot of their own tools and technologies to function. You could say that Honeywell is a large legacy company that has a solid line of products, it functions in an industry where there’s not much new competition grabbing at your throat, and that in and of itself makes it a buy. However, while Honeywell may have fit into the average portfolio that needs manufacturing just fine, it’s not exactly an amazing value. It has several large competitors domestically and internationally and they don’t do seemingly anything outside of the ordinary that GE (which is a better value) does, or that Siemens (an international competitor) does. As far as the average investor can tell, there’s no growth prospect for him and as far as the experienced one can tell, there’s no opportunity within the company either. However, as I was going through the news (as an investor should) I discovered that Honeywell is developing their own quantum computer, which should position it very nicely for an investor looking for safe and sustainable growth as Honeywell has some very solid financials and the potential in the quantum computing segment is huge. Due to COVID-19, their past quarterly results were significantly down as their aerospace revenues depend significantly on global air traffic, but their share prices haven’t suffered much and that I believe has primarily to do with the 2 things I’ll discuss in here; an exceptionally strong balance sheet and a high-growth potential industry.

Let’s start off looking at Honeywell’s finances:

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

For the past few years, cash has grown at a far higher rate when in proportion to total debt

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY
r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

Here’s a peak into Honeywell’s Income statement, whose growth has been pretty constant until (seemingly) last year. But the reason revenue and Net Income shrank was due to two spin-offs that provided over $10B for them. When factoring for revenue lost due to the sold assets/liabilities, Honeywell’s revenue actually grew by 4% from 2018-2019

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

Due to the sales of unprofitable assets, Honeywell’s gross profit margins have increased significantly in the past 2 years

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY
r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

This explains the EBITDA growth over the past few years as well

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

Here’s how Honeywell’s divisions split up currently, with aerospace making up most of their sales, and that division has increased sales by 9% from 2018-2019 when adjusting for spin-offs .

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

Here’s Honeywell’s cash per share, which has grown very quickly since 2015

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

Here’s their free cash flow, which has also been accumulating several years

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

This is Honeywell’s EBITDA growth over the last 20+ years

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

And here’s their SGA Expenses per $ of gross profit

Their profit consistency compared to General Electric or Boeing, two similar industrials companies is remarkable:

r/wallstreetbets - LONG $HON QUANTUM SUPREMACY

Honeywell clearly knows how to manage their financials despite being a complicated conglomerate, which is why their stock price has recovered so well compared to BA and GE. This shows that regardless of how overvalued it may be, that’ll be justified by the means of their consistently growing profits. Investors seek conservative companies such as Honeywell, especially during times of financial volatility, which is why the stock price has fared so much better during these past couple of months compared to their competitors.

The Future:

This year despite all of the troubles with COVID-19, Honeywell was able to deliver on their promise of making the world’s highest-performing quantum computer this year. You’ve probably heard the term, but haven’t really bothered to try and understand it. Here, I’ll draw out a very basic dichotomy between a normal computer and a quantum computer.

Traditional computers perform their problem solving through processing information in “bits” which are binary (0s and 1s). These bits are processed through transistors as electrons, but as transistors get smaller and smaller, they reach a point at which the laws of quantum mechanics prevent any further shrinkage. Quantum computers would process information as qubits, and these blocks of information can contain any proportion of 0s and 1s inside of them (superposition), and this greatly increases their information storage capabilities we’d have for problem solving. Another important property of qubits is their ability to become entangled; to have two particles change in accordance with each other, unlocking powerful parallel processing opportunities.

Quantum computing will be an essential technology for Artificial Intelligence, because AI is very simulation and probability based, the nature of quantum computers processing power would be ideal in order to accelerate the parallel processing needed to train and use ML models. In order to solve for the amount of simulations you need for AI-based solutions, the qubit would be the perfect means to solve them. AI solutions can range from cryptography, financial modeling, weather forecasting, and even particle physics.

“For example, pharmaceutical companies could accelerate the discovery of new drugs, materials companies could discover new molecular structures, finance companies could develop new trading strategies, transportation companies could optimize logistics, and companies relying on the output of machine and deep learning could perform analyses that are impossible with classical computing of today”

Honeywell is partnering with Microsoft Azure Quantum to enable their computer and they already have a client using it in JP Morgan. Honeywell Ventures has also invested in two large quantum computing companies, Zapata and Cambridge Quantum. Add to that Honeywell’s quantum supremacy: “With a quantum volume of 64, the Honeywell quantum computer is twice as powerful as the next alternative in the industry”

Due to the particularly industrial nature of quantum computers themselves, Honeywell is actually not a surprising entrant into this space. They already have an extensive software segment, and aren’t a slouch there by any means either. Honeywell’s system has double the quantum volume of IBM’s quantum computer. Honeywell also “unveiled a two-tier subscription plan designed to make it easier and less expensive for users to upgrade quantum systems”. If Honeywell can successfully create a subscription model for easier quantum accessibility, it would be the next biggest enterprise solution software, magnitudes greater than something simple like CRM. It’s obviously a very complicated and foggy outlook still as to the mysteries of quantum computing, but we know the potential would be tremendous and it could create another leap in the types of problems we can solve as a civilization.

Not only is a Honeywell a decent value stock by itself, it also has tons of potential with this new segment which investors are clearly pricing in. There are pretty much no events or anything that can cause some awesome volatility for us to bank off, but I think in the next 2-5 year span we’ll see a good amount of growth if this works out, so hold stock, but be on the lookout for any announcements that you could possibly play (again no short term play here, sorry)

Positions: Smelly