Resideo Technologies' (REZI) cancellation of its indemnification agreement and planned spinoff of ADI Global will drive value, Morgan Stanley said in a Tuesday note.
The company's Q2 performance was "strong" with results surpassing the high end of guidance, as it continues to execute consistently, Morgan Stanley analysts said.
Resideo agreed to make a one-time payment of $1.59 billion to Honeywell (HON) to eliminate all future monetary obligations under a 2018 indemnification and reimbursement agreement tied to its spin-off from Honeywell.
The recent cancellation of the Honeywell indemnification agreement has removed a "structural impediment for investors" and adds an upside of around $0.40 to Resideo's annual non-GAAP EPS, the analysts said. They noted that the market continues to underappreciate the importance of the removal of this significant headwind.
The planned spinoff of ADI Global "creates a much clearer path" to unlocking value, the analysts said. The transaction makes sense as the remaining Products and Solutions business of Resideo have few strategic synergies under one business entity, and both now have an opportunity to increase focus and accelerate reinvestment, they said.
Morgan Stanley upgraded Resideo's stock rating to overweight from equal-weight and raised the price target to $35 from $24.
Price: 30.99, Change: +3.52, Percent Change: +12.81
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