REZI

Resideo ($REZI) Investment Landscape Shifts with PE Fund's $350M Buying Spree + Morgan Stanley Upgrade

08/13/2025 01:07

An intriguing investment story is unfolding at Resideo Technologies ($REZI). This mid-cap company specializes in home comfort and security solutions, operating as a Honeywell spinoff that provides global residential technology products including temperature control, security, and fire detection systems. The company operates through two main segments: Products & Solutions and ADI Global Distribution, pursuing growth through strategic acquisitions in recent years. The most notable development is CD&R Channel Holdings' investment activities. This private equity affiliate began with an 11.3% stake disclosure in June 2024, then launched aggressive share accumulation this year. Following purchases of approximately $100 million on May 9 and another $100 million on July 25, they executed massive consecutive buying totaling $350 million over three days from August 8-12. These purchases occurred at $27-31 per share levels, demonstrating strong conviction even near current price levels. This contrasts sharply with company executives' mass selling in November 2024. While CEO Jay Geldmacher and other key executives sold approximately $4.5 million worth of shares at $25-26 levels, professional investors are accumulating shares at higher prices. This suggests external experts value the company more highly than internal management. The key inflection point investors should note is the July 30 announcement terminating the Honeywell indemnification agreement. Resideo will make a one-time payment of $1.59 billion in Q3 to eliminate all future potential obligations. This resolves structural burdens the company carried since its spinoff, which Morgan Stanley cited on August 12 when upgrading to 'overweight,' noting "a structural impediment for investors has been removed." Financially, Resideo shows solid performance. Q2 2025 revenue increased 22% year-over-year to $1.94 billion, exceeding expectations, while adjusted EBITDA grew 20% to $210 million. The ADI Global Distribution segment drove growth with 33% expansion, and overall gross margin improved 120 basis points to 29.3%. The company raised annual guidance to $7.45-7.55 billion in revenue and $2.75-2.87 adjusted EPS. However, investors must consider several risk factors. One-time Honeywell-related costs resulted in a Q2 net loss of $825 million, and the debt-to-equity ratio stands at a somewhat elevated 87%. The current ratio of exactly 1.0 indicates limited short-term liquidity cushion. Additionally, the beta of 2.16 suggests higher volatility than market averages. Analyzing forward scenarios, the optimistic case involves successful ADI segment spinoff with each business unit securing independent growth drivers. Morgan Stanley's $35 target price suggests 12% upside potential from current levels. The base scenario expects improved financial structure following Honeywell contract resolution and continued revenue growth. The risk scenario involves the $1.59 billion one-time payment impacting cash flow and debt structure more than expected, potentially pressuring the stock. CD&R Channel Holdings' consecutive massive purchases suggest strategic intent beyond simple investment. Given their average purchase price aligns with recent trading levels, they appear to see substantial upside potential even at current valuations. Their continued buying during early August's market-wide correction demonstrates strong conviction. Overall, Resideo appears to be entering a new growth phase supported by structural improvements and aggressive backing from professional investors. The combination of Honeywell burden resolution, planned ADI spinoff, and consistent operational improvements significantly enhances medium to long-term investment attractiveness.