Resideo IPOs, Then Plunges

By Dan Gelinas, Published Oct 31, 2018, 09:49am EDT

ADI and Honeywell Homes management have been touting their spinout and IPO for months, including appearing on Wall Street as they widely shared on social media:

And:

However, the stock is down 29% from the start of when-issued trading, as shown below:

[Update: it fell again on day 3, falling as far as $19.40 but finishing the day down just another 3.79% at $21.08.

What is happening? What is the outlook for the newly independent company?

In this note we look at:

  • Strong Optimism from Resideo
  • Resideo's IPO
  • Steady Decline Over First Two Days
  • Valuation
  • Bull and Bear Case from Financial Experts

Strong ******** **** *******

*** ******* ******* *** announced ** ******* **** and **** *** ********* year, *** ******* ******** for *** ************ ******** ********** **** in *** **** **** on ******* **, ****, **** ***** *** Joe ***** ********** ********** that *** ******* ***** launch, **** *** *** create ***** *** ************:

***** ***, **'** ******* to *** *** **** executed ****. ****'* ********* number *. ***** ***, it's ***** ******* *** of *** ***** *** being ******. **** ** not * ***** ** company ****'* ****** ** figure *** *** ** get *** ******** **** he ***********. ** **** a ****** ******* ***** and **** **** ****. We **** **** **** top *** ****** *****. I’m ********* **** *** team **’** *** ********. We’re ****-********** ** ***** shareholder ****** **** *** future.

** *** ******** ****, Resideo ****** ******* ** company ***** ******* *** opening **** ** *** New **** ***** ******** on ******* ****, ********** with *** ***:

Resideo's ***

*** ***** ***** "****-****** *******" ** ******* ** at $** *** ** fell *** *** **** 2 ***** ** **** officially **** ******* ******* at ~$**, * **** of ***** **%:

Steady ******* **** ***** *** ****

*******'* ***** *** * steady ******* **** *** first *** **** ** trading *** ******** ********* under $**:

*********

*** *******'* ****** ********* is *** ~$*.* ******* USD (*** ******* ****** x ~$** *** *****) compared ** ******* ** ~$4.5 *******. ** ** low ******** ** *****.

***** **** ************ / **** distributor ******* ***** ********* but **** **** ****, it ** *** ***.

************ **** ** *** significantly ***** ********** ******** to ***** ***** ***** those businesses ******** ***** ****** relative ** ***** **** manufacturers. *** *******, ******* does ****** ~$ * billion ** ******* *** only *** * ****** market ************** ** ~$* billion. ** * ******* ratio, *** *** **** of *******'* ******** ***** ***** at ~$*** *******.

*** ********* **** **** of *** ******** ** significantly **** ********** **** the *** ****, **** though ***** *** ******** less *******. *************, **** with ****** ****** ***** like ********* ***** **** to ***** ** ** revenue ** ******.

********, **** ***** ************** put ******* ** * $3.2 ******* *********.

Analyst *****

** ******* ** ************.*** had **** *********** ****** to *** ***** *** Resideo *** [**** ** longer *********] *** *** it ********* ** ** did, claiming **** *** **** can ** ********** *** factors. *****, **** ***** investors *** ***** ******** to ****:

****-**** *** *********** ** investors (*** **** **** in ** ***) *** so ***** ** **** little ********* ********* *** new *******. *********, ** or *** ******** ***** the ***** *** ** it ** *** ******** to ************* *********. *******, the ****-*** ** ******* much ******* **** *** parent *******, *** **********, institutional ********* *** ********** **** ****** shares ** *** ****-***. Let ** *******. ** a ***** *** ****** fund ******* **** * large *** ******* ***** distributes * ***** *** spin-off, **** ****** **** manager’s ********** ******* ******** the ******* **** ******* the ****-***. *** ***** reasons, **** ********* **** their ****** ** *** spin-off ********** ** ***** or ********** *****.

******, **** ********** ******* a *** ******** ***** price:

*** ********** **** ** the *** ****-*** *** very ****** ********* ** promote *** ******* *********. In ****, *** ********** team ** ************ ** *** ******* the *****. ***? ******* management ***** ******* *** usually ****** ***** ** the ***** ****** ***** of *******. *** ***** the ***** ****** *********, the ******* ***** ********* the ******* ****.

********

******,* **-**** ********************* & **. ***** *** **** **** *** stock ***** **** **** **** 12-18 ****** ** $** (or ** ********* ********* of $*.* *******):

*** ****** ******** *** forecast, ******** **** * shift ****** ****** ****** products *** *** **** win *** ***:

**** ****** ****** *** categories, *** * ******** mix ***** ****** ******-****** Products ******** *** ********* revenues, ** ***** **** is ** *********** ********** opportunity. *** ** ** spun *** **** ****** Honeywell, ******* ** ******* on *** ************ ******* and ****** ******* ****** shares ** ********, ******* & **** *** ************. Its ***** *** *** line ****** *** ********* from *** ***** ****** “connected” *******, *** ******** could ***** ************. *** spin-off ** *** *** October **. ** ******** coverage **** ** ********** and $** ***** ******.

Bear ****

*************.*** ******* ***** *** **** ****, *********** that ******* *** ** pay ********* ** ** $140 ******* ******** *** the **** ** *****:

******* **** **** ******** to ********* ***** ******** indemnification *** ************* ********** that ******* ****** *********'* related ****** ********* ********, including *** ****** ******** liability **** ****** **** the ********** ** *** legacy ************** ******* ********... Given **** ***** ** no ***** ********* ****** and *** **** **** the ******* ** ** the **** *** *** next ** *****, ***** that ***** ** ******* visibility ********* *** ********* future **** ******, ****** it **** **** ********* to ********* ** ***** intrinsic *****. ***** *** maximum ********* **** *** company *** *** ** any ***** **** ** $140 *******, ** ** unclear ** **** *** magnitude ** ***** ******** will **.

**** ******** **** ***** $1.2 ******* **** *** risk **** ******** ******** could **** ** * recession:

********, ***** **** *** company ******* **** ** will ***** **** * limited ****** ** **** and *** ***** *** $1.2 ******* ******* ** loans ** **** *** financing *****, ** ***** that **** ******* ******** is *********. ** * prospective ********, *** ****** that ******* ************ ***** face ****** *********** ** over $*** ******* **** its ****** *********** *** interest ******** ******** ***** me ******* **** *** company ***** **** ** face ******* ******* ** there ** **** * sharp ******** ********. **** risk ******* ************ ********* when *** ******* **** the ******** ******** **** the ******* ****** **** is ******* *************.

Challenges ** ***** ******

***** ****** ***** ** magnify **** *** *** cycles *** *********, ********* to **** ******* **** Honovich:

***** ******* ** * small **** ** * publicly ****** ******* (** Resideo ********** ***) *** the ********* ** ******** information ***** * *******’* performance *** ********. **** things *** ***** ****, employees *** ***** *** brag ***, *** **** side ** **** **** do ***, ******** *** find ***. ********, *.*., lived ******* **** ***** of ****. ******* ** very ******* ****** *** good *** *** ** this.

******,*********'* *** **** ******* * ****** **** picked ***** ******** ** Canon **** ***** ******, noting:

[*****] ******, *** ********** would ** ****** ************, and **’* ********** ** under ******** ** ***********. To ** ******* ******, it ****’* ********* * was ******* ******* **.

******* ** *** ******* is ******* ******* ** this, **** *** ****. And *** **** **** is **** **** **** low ***** *****, **** do **** *** ********* to ****.

Poll / ****

Comments (20)

Dan, good post.

Btw, wow, it's down again today, now under $21:

$20, do I buy a share of Knightscope, or a share of Resideo? Tough call. I'll probably just get a few Happy Meals with my money, likely to yield a better ROI, depending on what the free toys are in the Happy Meal this week.

Thanks John. I know. It's just on a slide. It will be interesting to see if they can overcome the inertia downward momentum highlighted in the seekingalpha story. 

Maybe ADI can put their own stock in one of their flash sales...

They already are. That’s why the price keeps going down. 😂😂

That is just cruel!!!  Funny, but cruel.

Resideo's branding that I have seen is Smart Home or Connected Home. As IPVM mentioned about the name Resideo, everything is centered around residential. How do manufacturers in the commercial space feel about this? Add that to the WhiteBox push, the manufacturers' of commercial systems may not be seeing the "love" out of ADI. The ADI Expo's were hit or miss this year with more seeming to be a miss.  ADI with WhiteBox could be viewed as a competitor to other manufacturers' of cameras, monitors, etc. Isn't Honeywell now in other distributors? I have heard Interlogix is no longer at ADI.  I know investors don't see this information but this has to be resulting in lost sales. Or is ADI growing in other areas that it makes up for lost sales in video, access, etc. If there was a Consumer Confidence Level or Manufacturers' Confidence Level for ADI, what would it look like?

A problem with concentrating on the consumer market, is that is also where all the "sexy VC money" goes. Resideo will have the DNA of large-industrial Honeywell for a long time.

I see the next Nest thermostat or Dropcam coming along, with pretty software, skillful marketing, and the ability to sell to a massive market at razor-thin margins or a loss, completely eating their lunch on the residential side.

Prediction: ADI itself will be spun off in a year.

Not sure why this is a surprise. After all it's ADI and Honeywell. The only company I would say is worse than these two is Comcast.

This update is included in the story above as well as here in comments:

An analyst at seekingalpha.com had some interesting things to say about the Resideo IPO and why it performed as it did, claiming that the drop can be attributed two factors. First, that large investors are being required to sell:

Spin-offs are distributed to investors (not sold like in an IPO) and so there is very little publicity regarding the new company. Generally, no or few analysts cover the stock and so it is not marketed to institutional investors. Further, the spin-off is usually much smaller than the parent company, and oftentimes, institutional investors are prohibited from owning shares in the spin-off. Let me explain. If a large cap mutual fund manager owns a large cap company which distributes a small cap spin-off, that mutual fund manager’s investment mandate prevents the manager from holding the spin-off. For these reasons, many investors sell their shares in the spin-off regardless of price or underlying value.

Second, that management prefers a low starting stock price:

The management team of the new spin-off has very little incentive to promote the company initially. In fact, the management team is incentivized to not promote the stock. Why? Because management stock options are usually priced based on the first couple weeks of trading. The lower the stock trades initially, the greater value potential the options have.

Resideo stock still down, a month later, and despite a bump in the first half of November, stock is under $21:

Resideo pays 1% royalty for using the Honeywell brand, which for current annual revenue is $30 million, per Joe Ragan, CFO, at Imperial Capital investor conference.

Resideo is doing $3BN??? ($30M is 1% of $3BN).

Hey Undisclosed #1, that valuation is what we determined in our reporting in the original story:

Valuation

The company's market valuation is now ~$2.7 billion USD (123 million shares x ~$22 per share) compared to revenue of ~$4.5 billion. It is low relative to peers.

Being half manufacturer / half distributor impacts their valuation but even with that, it is now low.

Distributors tend to get significantly lower valuations relative to their sales since those businesses generate lower income relative to sales than manufacturers. For example, Anixter does nearly ~$ 8 billion in revenue but only has a public market capitalization of ~$2 billion. At a similar ratio, the ADI side of Resideo's business would trade at ~$700 million.

The Honeywell Home side of the business is significantly more profitable than the ADI side, even though Homes has slightly less revenue. Manufacturers, even with modest growth rates like Honeywell Homes tend to trade at 1x revenue or higher.

Combined, that would conservatively put Resideo at a $3.2 billion valuation.

Right, but they're paying the 1% on revenue, not valuation. I was assuming the valuation had a little bit of future-looking hope/magic in it, but this says they're basically valued at 1x. Guess I shouldn't be too surprised, all things considered.

Resideo announced their Q4 financials and the stock drop 23%:

Catch a falling knife? Place your bets!

Down further over the past 6 months:

Update: Resideo stock has plunged afterhours, down ~30% to ~$10 now:

The dreaded 'CFO transition' announcement plus pre-announcing significantly lower results than expected.

According to their release, looks like ADI is fine but the other business areas have problems:

In the third quarter, the ADI Global Distribution business continued to grow as planned. The Products & Solutions segment experienced revenue decline in certain product families of the Comfort business and in its Residential Thermal Solutions (RTS) gas combustion business. We believe the RTS slowdown was driven by certain recent regulatory changes and a general slowdown across large OEM customers in the sector.

Those who bought "low", some decent gains in a few months time.....~$11.75 now which is >25%...

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