Resideo Technologies Investment Thesis

Resideo Technologies, Inc. [NYSE: REZI] develops, manufactures, and sells home comfort and security solutions, including smart thermostats, security cameras and more, primarily in residential environments.

REZI became an independent, publicly traded company in late 2018 as a result of Honeywell spinning off its Homes product portfolio and ADI Global Distribution businesses. The company’s products are licensed under the Honeywell Home brand.

Resideo operates through two segments:

• Products & Solutions, and
• ADI Global Distribution.

The Products & Solutions segment consists of connected thermostats, whole-home installed and monitored security systems, whole-home air purifiers and humidifiers, furnace and boiler controls and fire detection devices, to name a few. 

ADI Global Distribution segment is the wholesale distributor of low-voltage security products, including intrusion, telecom, network and audio-video (AV), access control and video products.

The Bull Case for Resideo Technologies

Resideo Technologies, Inc. (REZI) sells comfort, residential thermal, and security solutions to over 150 million homes globally.

Resideo operates in “large markets that sit at the intersection of multiple secular growth trends”. The company believes that there has been, and will continue to be, a gradual shift toward a cleaner, more distributed and efficient energy ecosystem, and security solutions at homes.

The decreasing cost of technology has enhanced the affordability factor, allowing consumers take better control over their homes by creating a comfortable ecosystem indoors. 

The company believes its “total addressable market represents approximately $114 billion, inclusive of $27 billion for comfort, residential thermal solutions and security, and $88 billion for distribution of low-voltage security products and additional adjacent products, including intrusion and smart home, fire, video surveillance, access control, power, audio and video, ProAV, networking, communications, wire and cable, enterprise connectivity and structured wiring”.

According to a Fortune Business Insights report, the global smart home market size stood at $79.9 billion in 2018 and is expected to reach $622.59 billion in 2026, at a CAGR of 29.3%.

This growth is expected to be fueled by several factors, including decreasing cost of technology; growing need for energy-saving, which eventually leads to lesser household expenses; low carbon emission-oriented solutions; expansion of smart home product portfolio; rising consumer disposable income in developing economies; greater desire for resource consumption; growing concern about safety and security, and proliferation of smartphones and smart gadgets, to name a few.

Resideo grew revenue 44% year-over-year as both, Products and Solutions and ADI, continued to benefit from positive residential spending trends, thanks to better customer support, sales force effectiveness and improved digital tools.

During the quarter, the firm aligned product management in the two groups, Integrated Home and Building Solutions, to focus more efficiently on the needs of its customers. Resideo (REZI) saw strong year-over-year growth across all major product categories, serving both, commercial and residential customers.

The company also continues to introduce new products, with the most noticeable being the release of the latest version of its Pro series security platform in North America. Even amidst the global Covid pandemic, revenues in the two largest segments, the United States and Europe, increased.

As the global economy shows signs of getting back on track, it is expected that Resideo will witness a higher demand for its products. It stands to significantly gain from consumers having more disposable income and wanting better control over their homes.

The company also increased prices of some its products, with the hike having no impact on its sales. This is evidence that consumers are willing to pay extra for its products owing to their technological superiority and the convenience that these products offer in a consumer’s life.

Latest Quarterly Results: 44% Revenue Increase

Resideo reported Q2 2021 earnings on August 6, 2021. The results were encouraging with the performance reflecting positive market trends.

Consolidated revenue of $1.5 billion in the second quarter 2021 increased 44% compared with $1.0 billion in the second quarter 2020, which was negatively impacted by the emergence of Covid-19.

Products & Solutions’ revenue was $598 million, an increase of 50% compared with revenue of $398 million in the prior year comparable period primarily due to strong demand across Products & Solutions’ end markets and channels.

ADI Global Distribution revenue was $879 million, an increase of 39% compared with revenue of $631 million in the prior year comparable period, primarily due to higher volumes as demand improved for products serving both, commercial and residential markets.

The Bull Case Bottom Line

All in all, the company’s continued strong performance, productivity improvements, and the near-term demand environment augurs extremely well for its future performance.

The company also possesses significant brand recognition, given its products are licensed under the Honeywell brand.

As one of the largest players in the space, the company has the expertise, resources and the products to leverage the uptick in demand for home-improvement technologies.

The Bear Case for Resideo Technologies

As with many other companies, Resideo Technologies makes use of debt. But the real question is whether the high debt is making the company risky.

The company ended Q2 with cash and cash equivalents of $579 million and total outstanding debt of $1.2 billion. Its net debt, as such, stood at $615 million compared to $1.1 billion at the end of the second quarter of 2020. Looking at the balance sheet, experts believe that debt is making Resideo Technologies stock a bit risky.

Also, the company continues to grapple with significant logistics and supply chain challenges, and these factors possess the potential of creating some headwinds for its financial results.

Resideo’s freight costs are also running well ahead of 2020 levels, as the tight supply chain situation and unpredictable ocean freight conditions are necessitating more expediting in air freight. Management expects supply and logistics headwinds to continue to create short-term challenges through at least the end of the year.

Resideo Technologies Stock Price Forecast

The 12-month price forecasts for Resideo Technologies range from a low estimate of $33 to a high estimate of 42.00.

On average, analysts expect Resideo Technologies’ stock price to reach $38.00 in the next twelve months, suggesting that the stock has a possible upside of 24%.

Is Resideo Technologies Stock A Buy?

A spin-out from Honeywell International in 2018, Resideo Technologies is a leading provider of home comfort and security products, including thermostats, security alarm panels, communication devices, video cameras, furnace controllers, water and air solutions, sensors and cables, to name a few.

Resideo greatly benefitted from the pandemic as people reconnected with their homes during the pandemic. Sales of items such as smart locks, security cameras, thermostats and video doorbells, among others, gathered momentum as people confined to their homes wholeheartedly took to restoration and renovation to make their abode more secure and energy-efficient.

And, as the economy opens up, it is great news for Resideo’s comfort, residential thermal, and security products, and also for its ADI Global wholesale business. As a consequence, Resideo reported a very strong second quarter, generating revenue $1.5 billion, an increase of 44% compared to the same quarter the previous year. 

Products & Solutions’ second quarter revenue of $598 million was up 50%, due to continued strong demand across its major product categories, geographies and channels.

ADI has also been performing well, meeting customer demand by focusing on delivering products that the customers need, when and where they need them. ADI’s focus on product availability has enabled the business to grab additional sales, and deliver strong support to existing and new customers. ADI Q2 revenue was $879 million, an increase of 39% year-over-year.

Demand was strong across commercial and residential markets, with over 30% growth in each of ADI’s six largest product categories.

ADI’s investments in e-commerce and digital selling tools continued to deliver results, with e-commerce sales up over 65% year-over-year, and accounting for 14% of ADI’s total sales. ADI’s two recent Norfolk and Shoreview acquisitions contributed $15 million in Q2 revenue.

ADI’s focus on product availability has enabled the business to grab additional sales, and deliver strong support to existing and new customers.

REZI Guidance Is Encouraging

As a result of continued strong performance and strong demand outlook, the company now expects 2021 revenue to be in the range of $5.85 billion to $5.95 billion, implying year-over-year growth in the range of 15% to 17%.

For the third quarter of 2021, Resideo anticipates revenue in the range of $1.5 billion to $1.55 billion, as it continues to take advantage of the positive business performance, positive market trends and strong brand recognition to better understand and support its customers.

Will Economic Tailwinds Slow?

Over the last one-year period, shares of REZI have significantly outperformed the overall market, courtesy positive economic trends, and a rising preference amongst consumers for home improvement.  The company’s earnings beat and updated guidance back generates a lot of confidence in its future prospects.

As the global economy continues to recover from the Covid pandemic, the company is well-positioned to increase its revenue in international as well as the US market.

REZI share price has significant upside potential given that the products and solutions it offers help in making homes more secure, energy-efficient and comfortable. 

At a price-to-earnings ratio of just 13 times analyst estimates for 2021 earnings, Resideo still looks like a good value despite its strong showing in the year gone by.

Resideo Technologies Investment Thesis Conclusion

Investment in smart home products is really catching up with consumers in the U.S. as well as around the globe. People are more willing to spend on smart home tech products as they help in conservation of resources, in addition to providing more security and a more convenient environment for homeowners to spend time in.

Smart home technology, apart from offering better security capabilities, also helps homeowners save on electricity and reduces power and water bills, which eventually leads to lower household expenses and reduced carbon footprint. The rapid expansion of smart home product portfolio, decreasing cost of technology, and rising consumer disposable income is most likely to help smart home companies like Resideo Tech.

And it is expected to get only better from here. The smart home space has plenty of room to grow in the United States. NPD’s Connected Intelligence report reveals that half of American consumers own at least one smart home device, up 35% since the beginning of 2020.

As per the report, the largest sales gains were seen in security systems, smart garage door openers, and smart lighting, which witnessed a jump of 44%, 21% and 19%, respectively, in 2020.

Moreover, the present Biden administration is keenly focusing on energy-efficient buildings and homes, having set a target to achieve net-zero emissions by no later than 2050, and upgrade 4 million buildings and weatherize 2 million homes over the next four years. The government, as such, plans to offer direct cash rebates and low-cost financing for home appliances upgradation and electrification.

While the government works toward climate-friendly technologies, and achieving net-zero emission, homeowners need to focus on carbon emission-oriented solutions for a more energy-efficient ecosystem. Smart homes are designed to conserve resources, and decrease overall household energy consumption. Hence, companies like Resideo Tech, operating in the smart home space, stand to gain from this trend.

The company also reported a good quarter, having topped estimates on both, revenue and earnings front. The company reported $0.39 EPS for the quarter, beating analysts’ consensus estimates of $0.31 by $0.08. Net revenue of $1.5 billion was up 44% from $1.0 billion in the second quarter 2020. Gross profit margin was close to 26% in comparison to gross profit margin of around 23% in the prior year comparable period. Operating profit was $121 million, an increase of $127 million over an operating loss of $6 million in the second quarter 2020.

During the quarter, Resideo also decided to relocate its corporate headquarters from Austin, Texas to Scottsdale, Arizona. This move is expected to help the company consolidate its real estate square footage and better positions it for engagement with key customers and suppliers. The headquarters’ move and resizing of its footprint in Austin are expected to generate ongoing annual savings of approximately $2 million.

REZI Buy or Sell: The Bottom Line

Better days should lie ahead for the company as it continues to grow and expand its operations and its product portfolio.

In an increasingly resource-conscious world, where conservation of resources, usability, user-friendly experience, and security are becoming top priorities for homeowners, people are going to need the technology REZI offers.

Overall, REZI operates in a market with tremendous growth potential, suggesting significant growth opportunities for the residential thermal and security solutions provider.

A top-notch new management team, good business momentum and a market-leading position warrants a solid investors’ interest in the company.  

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.