Resideo Technologies A fix built on execution not inflation

For two years the market paid up for companies that could raise price. Now inflation is cooling and investors are asking a tougher question. Which margins were real and which were only riding the wave. We think Resideo is showing something different. The company has delivered a long run of gross margin gains that look tied to mix, synergies and operations rather than simple price lifts. That matters because those drivers last longer than a macro tailwind.

Our stance on the shares

We initiate with a Hold and a $47 price target. At a $44 share price, the stock sits on roughly 14.8x our FY26 EPS of $2.98. We bridge to a normalised 15.8x as proof points stack up. That gives about 6% upside. The path to a higher multiple looks open but not yet earned. We see the main unlocks as sustained gross margin progress, cash conversion clearing 50% and clearer capital allocation after indemnity noise fades. Until those are visible in print, we keep risk balanced.

What the market is missing about Resideo

Many investors still frame Resideo as a tariff and spin clean‑up story. We think the bigger shift is inside the model. Products and Solutions has improved pricing discipline and factory efficiency. ADI is absorbing Snap One, which brings higher margin exclusive brands, a stronger pro integrator base and a more complete offer. Management has been consistent on focus and cost. The result has been eight straight quarters of gross margin expansion and a lift in Products and Solutions margin to about 40% in the latest period. These are not one‑time benefits in our view. They look like structural improvements built on mix, process and scale.

The Snap One case is important. Management targets at least $75m of synergies over three years. Early run rate was about $17m in 2024. We expect more to come from brand exclusivity, category management, procurement and a cleaner ecommerce funnel. This is why we expect margin gains to persist even if volumes stay steady.

Why we anchor valuation on normalised earnings

We use a PE on FY26 earnings rather than a near term EBITDA or DCF. Our reason is simple. The story hinges on margins and cash conversion normalising as integration and operations mature. A FY26 earnings bridge captures that reset without leaning on a cycle bounce. Peers in distribution and building tech sit near the high teens. Resideo has held a discount because of execution and governance risk. If cash conversion moves toward peers, synergies land and indemnity cash outlays get clearer, that discount should narrow.

We take a 15.8x multiple on $2.98 EPS to reach $47. We think this is fair against a peer group near the high teens and a company history that traded below peers. If cash conversion fails to clear 50% we would hold the multiple near 14.6x, which points to about $43.5. If proof points are strong and the market pays a peer level 17.8x, the target could move toward $53. We prefer to stay in the middle until evidence arrives.

How the numbers should move next

We forecast gross margin to rise to 28.8% in FY25 and 29.4% in FY26. The drivers are mix improvement as exclusive brands scale, procurement savings, factory utilisation and price that offsets most tariff drag. We model about one third of the Snap One synergy target dropping to cost of goods by FY26, with the rest in mix and scale. Volume is not the main story in our view. Mix and execution are.

We expect adjusted EBITDA to grow about 13.5% in FY25 and about 9% in FY26. That implies 60 to 80 bps of margin expansion in FY25 built on gross margin traction and operating leverage in Products and Solutions, plus incremental Snap One benefits at ADI. We keep SG and A roughly flat as a percent of sales while funding a tighter product roadmap.

Operating income stepped down in 2024 on integration costs but should rebuild. We model about $575m in 2025 at an 8.3% margin and about $640m in 2026 near a 9% margin. That assumes integration costs fade, gross margin holds its gains and synergy flow‑through is steady. This path does not need a hot demand tape. It needs execution.

Top line should be sensible. We forecast about 7% growth in FY25 and about 6% in FY26. Pricing taken in the spring offsets most tariff costs and supports revenue per unit. Snap One broadens the offer, raises attach and deepens share with integrators. Ecommerce at ADI is growing at about 15% organically and should help mix and service without inflating inventory.

Cash matters most. We model operating cash flow of about $400m in FY25 and about $435m in FY26. FY25 dips from a record base as working capital normalises after a big release. By FY26 the ERP settles, capital intensity eases and synergy capture should improve DSO and turns. We also expect clearer terms on the Honeywell indemnity to reduce cash leakage and raise predictability. That is how cash conversion clears 50% through the cycle in our framework.

Key proof points to watch

Gross margin should keep moving up quarter on quarter. That will show mix and pricing are sticking. ADI synergy disclosure needs to rise with a clear run rate for Snap One. Watch how much drops to cost versus mix. Working capital is the swing. DSO and inventory turns need to trend better if cash conversion is to move above 50%. Management commentary on indemnity and capital allocation is also key. Less uncertainty lowers the cost of capital and helps the multiple. Finally, ecommerce growth and the scaling of exclusive brands at ADI are simple KPIs that reveal health in the channel.

Why we keep our guard up on valuation

There are risks that can cap the multiple even if operations improve. The capital stack includes a new Series A preferred that can absorb cash through regular dividends. That may limit buybacks or slow balance sheet repair. CD and R has about 11% voting power, board seats and approval rights over key actions. This governance overlay can keep a discount in place longer than bulls expect. We do not assume it goes away fast.

Competition will not sit still while integration runs. Rivals can use the window to lock in customers, push ecosystems and widen product gaps. If integrators see friction in interoperability or service as Snap One folds in, synergy capture can slip. Resideo also sources from Asia. Trade or geopolitical shocks can lift costs or limit supply. Management did offset 70 to 80% of tariff headwinds with pricing in the past. That may not be enough in a sharper shock.

Turnarounds often discover more problems. If further issues surface, timelines stretch and cash needs rise. Equity dilution then becomes a risk if the company must shore up liquidity or refinance at tough valuations. We see that as a low probability but real risk, which is why we do not chase the multiple in advance.

Where we could be wrong

Our Hold can be too cautious if the company executes faster. If Snap One synergies arrive ahead of plan and flow more to cost than mix, gross margin could overshoot. If cash conversion clears 50% early and stays there, the market can pay a peer multiple sooner. Clear and favourable indemnity outcomes could also speed up capital return and strip away the governance discount.

On the other side, we could be too optimistic on the pace of cash repair. The ERP roll out, store changes and working capital normalisation can drag longer. If ecommerce mix creates fulfilment costs that offset margin gains, the EBITDA bridge can narrow. Integrator churn or supplier issues could slow ADI momentum. Any of these would keep the stock pinned to a lower multiple.

We state these cases because our calls rely on what we think are durable drivers. If the drivers shift, the thesis must shift with them.

The simple take

Resideo is not a macro pricing story in our view. It is an execution story that is moving in the right direction. Gross margin is rising on mix and cost. ADI has a clear synergy path with Snap One and healthy ecommerce growth. Pricing has largely bridged tariff costs. Cash conversion is improving with a credible route to more than 50% through the cycle. Governance and integration risks are real and explain a valuation discount that should narrow but not vanish overnight.

We initiate with a Hold and a $47 price target based on $2.98 of FY26 EPS at 15.8x. The upside to a peer multiple is there if proof builds. The downside is cushioned by visible improvements and portfolio value. We will change our stance if the next few quarters deliver clean progress on gross margin, cash conversion and synergy run rates. Until then we are patient but not complacent.