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Two-Stage Break-Up, Let's Take a Look at REZI

The second stage of Honeywell’s (HON) two-stage break-up, Resideo Technologies, Inc. (REZI), will begin trading on October 29, 2018 as a global provider of HON’s Homes and ADI Global Distribution business. This report not only focuses on REZI but the new HON (post its Spinoff of GTX and REZI) and its growth potentials going forward.

The Edge View...
Just after the first Spinoff of Garrett Motion, Inc. (GTX) on October 1, 2018, the industrial giant Honeywell International, Inc. (HON, Parent) has quickly turned around for its second Spinoff, this time of its Homes and ADI distribution business, Resideo Technologies, Inc. (REZI). REZI will begin trading as a new independent publicly traded company on October 29, 2018.

GTX vs. REZI: Having already seen GTX come off from its highs of $19 all the way down to $15 in only a couple of weeks from its Spinoff, REZI has some similarities and differences to that of HON’s first Spinoff. REZI will see index selling pressure just like GTX saw post-Spin, with the exception that REZI will be a MidCap 400 name and not a SmallCap 600 stock like GTX (REZI is currently trading at a $3.8bn Market Cap). Likewise, similar to GTX, REZI will be strained with the legacy liability taken from the Parent post-Spin ($640m in total, with a $140m cap per year). However, REZI will have a much lower leverage profile than GTX (better cap structure) and does not have any auto exposure, which is currently hitting GTX and other auto parts stocks in the market.

HON (ex-Spin): On the Parent’s side, we believe that HON (ex-Spin) will benefit from the emerging supply chain automation business where HON caters to well-known clients like Amazon, Inc. (AMZN). We expect the automated supply chain market will reach $101bn by 2024 from the current $46bn at a CAGR of +12.1%, and HON is positioned to cater to this market going forward. For longer-term investors, we see potential divestiture opportunities of the Safety & Productivity and Performance Material segments at HON (ex-Spin) further down the road to unlock additional value.

Previous 2016 Spinoff...
This two-staged break-up follows the successful tax-free Spinoff of its Resins and Chemicals business, AdvanSix, Inc. (ASIX) in October 2016 – a leading manufacturer of Nylon 6. Here, HON holders received 1 share of ASIX for every 25 shares held in HON. Since its split, ASIX significantly outperformed the market and generated a massive return of +151.2% compared to the S&P SmallCap 600 Index return of +21.8% in the initial year from the Spinoff. We believe these two upcoming Spinoffs will have the ability to follow ASIX’s example, as REZI will position itself as a leader in smart home & security appliances supporting Amazon Alexa, Apple HomeKit, Google Home & Samsung SmartThings, like ASIX’s post-Spin market-leading position in its own space.