Over the past six months, Resideo’s shares (currently trading at $35.62) have posted a disappointing 13.8% loss while the S&P 500 was down 1.3%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Resideo, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Resideo Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Resideo. Here are three reasons there are better opportunities than REZI and a stock we'd rather own.
1. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Resideo’s flat EPS over the last five years was below its 8.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Resideo’s margin dropped by 21.1 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. Resideo’s free cash flow margin for the trailing 12 months was negative 16.8%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Resideo’s ROIC averaged 4.8 percentage point decreases each year over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Resideo isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 11.4× forward P/E (or $35.62 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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