Resideo has had an impressive run over the past six months as its shares have beaten the S&P 500 by 13.9%. The stock now trades at $24.20, marking a 23.6% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Resideo, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

We’re happy investors have made money, but we don't have much confidence in Resideo. Here are three reasons why REZI doesn't excite us and a stock we'd rather own.

Why Is Resideo Not Exciting?

Resideo Technologies, Inc. (NYSE: REZI) is a manufacturer and distributor of technology-driven products and solutions for home comfort, energy management, water management, and safety and security.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Resideo’s 5.4% annualized revenue growth over the last five years was tepid. This was below our standard for the industrials sector.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Resideo, its EPS declined by 7% annually over the last two years while its revenue grew by 1.4%. This tells us the company became less profitable on a per-share basis as it expanded.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Resideo’s $1.99 billion of debt exceeds the $531 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $269 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Resideo could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Resideo can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Resideo isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 9.8× forward price-to-earnings (or $24.20 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere. We’d suggest looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.

Stocks We Would Buy Instead of Resideo

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