On March 7, Resideo reported fourth-quarter earnings, the company’s first full quarter since its spinoff from Honeywell. The results were solid, but because the company readjusted its forecast lower (down to just 4% growth) for 2019 based on potential softening of the economy, the stock market reacted negatively.
The stock price fell 25% on the day to hover around $18 per share. (On Friday, March 15, the stock was trading above $20).
During the latest twelve months ended Dec. 30, 2018, Resideo generated revenues of $4.8 billion, adjusted EBITDA of $639 million, adjusted EBITDA (including environmental payments) of $499 million and adjusted earnings per share (EPS) of $2.47.
Based in Golden Valley, Minn., Resideo operates the Honeywell Homes products brand ADI Global Distribution. The company has a significant presence in the connected premises software solutions market with 4.7 million connected customers and 2.3 million security panel signals transmitted daily, according to the Imperial Capital report.
In the coming fiscal year, Resideo management has expressed plans to invest $90 million toward new product and software launches, along with scaling its smart home and security platform. Concurrently, according to Imperial Capital, management is focused on improving its margins and expects to eliminate $50 million in overhead costs by the end of the year.
Although management has said it intends to pursue tuck-in acquisitions to boost revenue growth, the Imperial Capital report notes additional strategic measures that could further solidify the company’s fiscal and competitive positions.
“We would be more enthusiastic if management were to focus on acquiring technologies that improve analytics of its current product offerings, provide the end-user with additional services, and introduce initiatives to improve its recurring revenue business,” the report states.
Among the rationale for assigning an outperform rating, Imperial Capital cites the company’s capital structure: $1.23 billion in secured and unsecured debt (1.9x net leverage), and $1.97 billion in total debt after accounting for indemnification liability and pension liabilities (3.4x net leverage). The company has $265 million in cash and cash equivalents. Imperial Capital calculates Resideo’s total liquidity at $615 million.
Significant Potential Growth Opportunities
Imperial Capital’s conversations with management have centered around the company’s focus on driving growth across five key areas, four of which are related to its products division. Within products and solutions, Resideo is focused on:
1) building innovation solution to address the end user’s critical needs;
2) leveraging technology to connect devices and drive additional services;
3) investing in the professional channels;
4) expanding into new channels (e.g., utilities, property managers) and high growth geographies with OEM partnerships.
Within the ADI business, management is supporting its professional channel to help drive improved customer service and grow into new categories.
The one-year price target of $24 is based on a blended rate of 0.75x EV/FY20E sales of $5.2 billion. The valuation assumes 1.25x for the product sales and 0.34x for distribution. Imperial Capital also takes into account the company’s FY20 adjusted EBITDA estimate of $453 million. The price target implies an EV/EBITDA multiple of 8.6x.
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