Resideo Technologies: Undervalued Stock With 56.5% Upside

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Investment Thesis

Resideo Technologies, Inc. (NYSE:REZI) has boosted its potential profitability from acquisitions and is currently undervalued by the market. It has the potential to grow revenues by 14% in 2022, which, relative to current analyst estimates of $32 per share, would lead to an even higher valuation of $39 per share.

Background

Resideo Technologies is a spinoff from Honeywell (HON), focused on home automation and security solutions. It posted a record revenue of $1.5 billion in the first quarter of 2022. It also reported supply chain constraints in semiconductors and freight to be the key bottlenecks in growing revenue and operational efficiency. RESI also entered into a definitive agreement to acquire First Alert in 2022 from Newell Brands Inc. (NWL), which is projected to add $395 million of revenue and EBITDA of approximately $55 million.

Competitor Analysis

According to Craft, the key competitors to Resideo Technologies, Inc. are ADT (ADT), Brink’s Co. (BCO), Allegion plc (ALLE), Eaton Corporation plc (ETN), and Alarm.com Holdings, Inc. (ALRM). Comparing these companies first based on Seeking Alpha’s company comparison feature, we note that REZI has a buy rating both in terms of Quant Rating and in terms of Wall St. Analysis. The rest of the companies have only mixed ratings.

Competitor Comparison

Analyzing the details of the comparison above a little closer, we see that REZI trades on a current PE multiple of 14, which makes it relatively undervalued compared to its competitors. The same can be said about the P/S ratio, which is valued lower than all the other companies in this sector. Based on this analysis, REZI would be a relatively safe investment that is currently being offered at a discount relative to the sector.

Key Metrics Comparison

Company Fundamentals

Looking at the company fundamentals, we see that the company’s cash position has improved substantially from 2017, $96 million, to $779 million in 2021. Having extra cash on hand has allowed REZI to make strategic acquisitions that will boost its future profitability. The total assets have grown modestly, from $4.5 billion to $5.9 billion. The total equity has declined from $2.7 billion to $2.3 billion.

Balance Sheet

Analyzing income statements, we see that the revenues have increased from $4.5 billion in 2017 to $5.8 billion in 2021, which is a rate of increase of about 7% annually. The net profits after tax have expanded from $59 million in 2017 to $242 million in 2021.

Income Statement

Company Valuation

Based on company management guidance, we can anticipate REZI to increase revenue to $6.65 billion after the First Alert acquisition. Compared to its previous guidance of $6.2 billion, this represents an increase of $450 billion by the end of 2022. It wishes to maintain a Gross Margin of around 27% and an effective tax rate of about 25%. Using the discounted cash flow model, we factor in this one-time increase and drop the subsequent revenue increases down to the historical 4% per year for the next five years. We see that RESI has this one-time increase in revenue in the model, we see that REZI has a 56.5% upside, with a fair value price of $39.19.

Fair Value Price Estimate

Revenue Forecast

Investment Risks

As it can be seen, the sector does contain companies with P/E multiples higher than REZI. These companies’ earnings are valued higher than based on their present P/E multiples. In an ideal scenario, the same analysis for all these companies should be performed to pick the best investments. Although such analysis is outside our current scope of this discussion, potential investors in REZI should check parameters discussed in this analysis for competitors to find investments that may have an even higher reward potential.

Conclusion

REZI offers an attractive return of 56.5% from the current stock price of around $25. Investors looking to profit from REZI should consider following any company news along with the earnings releases to ensure that their acquisitions are performing as expected.