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In this market, it can be difficult to find companies with attractive prices. Yes, there are many cheap businesses out there. But many of them deserve to be cheap. However, there are some that are listed at a low price, which probably They deserve to trade a little higher than where they are right now.
One company that I think is a good candidate for that type of list is Resideo Technologies, Inc. (New York Stock Exchange:RESI), a producer and developer of products and solutions associated with things like energy management, water management, safety and security, and more, for homeowners. After a strong fiscal 2022 from a sales perspective, 2023 showed some weakness. Bottom line results have been quite mixed over the past three years and management is forecasting a likely decline in revenue this year. But even after taking into account these issues, the stock appears to be relatively attractively priced to the point that a “buy” rating probably makes sense.
An interesting company close to home.
To truly understand Resideo Technologies, it would be best to separate the company into its two segments. The first of them is the Products and Solutions business. Through this, the company produces products and solutions for energy management, safety and security, and more. Specific examples include temperature and humidity control devices, thermal and combustion solutions, indoor air and water quality products, smoke and carbon monoxide detectors, sensors, video cameras, maintenance tools and more. It even produces things like firefighting products, security panels, and offers certain cloud infrastructure offerings.
In essence, one could argue that Resideo Technologies is at the center of the “connected home” or “smart home” trend that was popular in the media several years ago. Currently, its technologies are connected to approximately 11.6 million homes in the markets in which it operates. The company can use the data it collects from this massive network to provide customers with additional information about their own homes and even alert the end user about important matters. In my opinion, this is a very interesting trend and could provide additional growth for the company in the coming years.
Ultimately, Resideo Technologies' Products and Solutions segment is responsible for 42.8% of the company's total revenue. However, even larger than this is ADI's Global Distribution segment. Through this unit, the company operates as a wholesale distributor of security products such as security, fire, access control and video products. It distributes more than 450,000 different products from more than 1,000 manufacturers with whom it partners in 13 different countries. The main customers here are largely professionals who focus on the installation or management of such products. This is an even larger segment, accounting for the remaining 57.2% of the company's total revenue.
Author – SEC EDGAR Data
Over the past three years, Resideo Technologies has been through a bumpy road. Revenue increased sharply from $5.85 billion in 2021 to $6.37 billion in 2022. To be very clear, most of the $524 million increase in sales the company achieved during this time, around $427 million In total, it was due to acquisitions. The higher sales prices added another $368 million to the company's revenue.
However, a reduction in product volume in response to these elevated prices affected revenue to the tune of $110 million, while foreign currency fluctuations impacted revenue by another $161 million. Then, from 2022 to 2023, revenue fell slightly to $6.24 billion. Lower volume affected sales to the tune of $414 million, while currency fluctuations affected sales by another $10 million. It was only thanks to a $153 million profit associated with acquisitions and a $143 million profit from higher sales prices that the company was able to avoid seeing an even larger drop in revenue.
All in all, the landscape has been somewhat volatile during this period of time. After seeing profits rise from $242 million in 2021 to $283 million in 2022, the company saw a decline in profits to $210 million last year. Much of the decline from 2022 to 2023 was due to lower gross profit, which management largely attributed to lower sales volume and a pricing and product mix that negatively affected the bottom line. Other profitability metrics have also been quite volatile. The good news is that operating cash flow peaked at $440 million last year. But the bad news is that if you adjust for changes in working capital, you get a decrease from $465 million in 2022 to $352 million last year. And finally, the company's EBITDA has been declining for at least the last three years.
To address some of these issues, management has been working to revitalize the business. The company incurred $42 million in restructuring expenses last year. Management also managed to sell certain assets, such as its Genesis Cable operation, for $86 million, although that will cost the company $105 million in annual revenue. The company even went so far as to subcontract its work at the foundry facilities it owned in San Diego. And this year, management is pushing for other changes that could include the sale of certain assets. However, none of this is going to change the fact that we face some questionable economic conditions.
For example, management expects the repair and remodeling industry to remain stable or for revenue to fall at a low single-digit rate this year compared to last year. There will be some normalization of inventory in the supply channel when it comes to HVAC offerings. This is expected to normalize in the first half of this year. But it could mean a quarter or two of additional pain.
Perhaps the best news for shareholders is that management anticipates new residential construction will increase at a rate in the low single digits to mid-single digits. In fact, I have written about this market before and I am of the opinion that the worst for the residential construction market is over.
Residential technologies
All combined, management. believe those revenues this year will be between $6.08 billion and $6.28 billion. They forecast earnings per share of between $1.48 and $1.88. At the midpoint, that would translate into net earnings of $244.1 million. Management said operating cash flow will be an unspecified figure greater than $320 million. By my own estimates, we should anticipate a reading of around $400 million. And finally, EBITDA should be between $560 and $640 million. That's $600 million at the midpoint.
The really cool thing about this is that these three profitability metrics appear to be higher this year than last year despite what will likely be a decline in revenue. Therefore, it is clear that management's cost reduction initiatives are working or are expected to work.
Author – SEC EDGAR Data
Using the aforementioned metrics, I was able to value the company in the future and value it with 2023 figures. Both results can be seen in the graph above. In absolute terms, the shares are attractively priced. However, we should also pay attention to the prices at which other similar companies are trading. In the table below, I compared Resideo Technologies to five similar companies. When it comes to the price-to-earnings approach and the EV-to-EBITDA approach, our candidate ended up being the cheapest of the bunch. And when it comes to the price-to-operating cash flow approach, two of the five companies ended up being cheaper than our target.
| Company | Price/Earnings | Price/Operating Cash Flow | EV/EBITDA |
| Residential technologies | 14.8 | 8.8 | 7.0 |
| Griffon Corporation (GFF) | 50.6 | 7.2 | 17.6 |
| CSW Industries (CSWI) | 37.5 | 20.3 | 20.2 |
| Masonite International (DOOR) | 18.3 | 7.0 | 9.5 |
| Hayward Holdings (HAYW) | 45.0 | 15.3 | 17.2 |
| Gibraltar Industries (ROCA) | 27.7 | 9.7 | 15.6 |
Carry
From everything I can tell right now, Resideo Technologies is experiencing some volatility. But that's to be expected in this environment. What is important is that management is making changes and that fundamental performance on the bottom line has not materially deteriorated.
Shares of Resideo Technologies, Inc. are trading at attractive levels, both in absolute terms and relative to similar companies. So, taking all of this together, I have no problem rating the company as a “buy.”
