Update on warrants

Turnaround in progress but gross margin neutrality likely pushed out to F2028; share dilution remains a headwind to the stock price; fair value estimate (FVE) lowered to $45 per share

Yesterday, after the market closed, WOLF reported 4Q F2026 sales of $149.6 million with a GAAP gross margin of negative 24.6% and a non-GAAP gross margin of -20% (versus -13% and -1%, respectively in the year-earlier period). Quarterly results were roughly in line although the outlook, at least anecdotally, was likely modestly disappointing, despite management highlighting the ~20% sequential growth in AI data center sales, the 5th gen SiC MOSFET technological breakthrough and its design partnerships with GE Aerospace and LITEON Technology as significant progress/wins in the quarter.

In terms of guidance, 1Q F2027 sales are projected to be $140-$150 million while adjusted gross margin is expected to remain negative. Two things that stood out to us were: 1) slower-than-expected gross margins improvement; and 2) the 30%+ share dilution (in part due to the conversion of $46 million of convertible debt). Perhaps most pertinently, management anecdotally indicated that a topline run-rate of ~$800 million is likely the tipping point towards achieving gross margin neutrality, which, based on our estimates, likely pushes that event out until F2028 (rather than late-F2027 in our prior view).

On two ancillary topics, we view the appointment of Andy Mattes (former CEO of Coherent and Diebold Nixdorf) to the Board positively given that his background aligns well; this could be incrementally conducive to the company’s ongoing turnaround efforts (which we think is progressing albeit at a slower pace than we initially expected). As well, we think the potential resolution of Wolfspeed’s patent infringement lawsuit with Navitas Semiconductor could be a latent potential catalyst.

For context, while we assume investor expectations will be tempered by this report, we also think the stock’s recent underperformance has to be seen in the context the broader risk-off sentiment (rather than a stark weakening in industry fundamentals) as evidenced by the contraction in peer multiples across the board (e.g., a 2-turn decline in the average and a 2.5x in the average, ex-Asia).

Our base case fair value estimate for WOLF is $45 per share, reflecting a 3.9x multiple on our 2028E sales forecast and a fully diluted share count of ~54 million.

Close coverage of LXFR with shares trading roughly in line with our fair value estimate as well as the agreed upon $17.37 per share cash take-out offer; we expect the transaction is likely to close as announced before the end of 2026 despite public pushback from a 5.6% holder

Recall, on July 27, 2026, Luxfer Holdings (NYSE: LXFR) announced a definitive agreement to be taken private by Wynnchurch Capital, L.P. for $463 million or $17.37 per share in cash.

The transaction, which has been unanimously approved by the Board and is expected to close before the end of calendar 2026, implied a ~31% premium to the stock’s closing price on April 28, 2026 (the day before the company reported 1Q 2026 results, modestly increased full-year guidance and indicated that it continued to pursue value-unlocking strategic alternatives).

Despite public pushback from Artisan Partners, a 5.6% holder, who intends to vote against the deal as it contends the purchase price is sub-optimal and fails to represent intrinsic value (while also seemingly accruing many of operational & commercial improvements as well as the divestiture of non-core assets to the buyer rather than investors), we think the deal is likely to close as announced.

As such, with shares trading roughly in-line with the proposed purchase price (as well as our $17 per share fair value estimate) we prefer to maintain our discipled approach and close coverage.

For context, shares of LXFR returned 47.5% since our initial recommendation in late-July 2024 (outperforming the S&P 500 and Russell 2000 indexes by ~10% and ~13%, respectively).

Close Coverage of WAT with more than 6 months having elapsed since its Spin-Off/RMT Transaction (i.e., BDX)

We withdraw coverage of Waters Corporation (NYSE: WAT) with more than six months having passed since the completion of its tax-free Reverse Morris Trust (RMT) transaction to better focus on more current and/or upcoming transactions.

For context, since our initial Neutral recommendation (moving to N/A) in early-February 2026 shares of WAT have advanced ~22.5% (outperforming the S&P 500 and Russell 2000 indexes by ~12% and ~10%, respectively.)

Close Coverage of BDX with more than 6 months having elapsed since its Spin-Off/RMT Transaction (i.e., WAT)

We withdraw coverage of Becton, Dickinson & Co. (NYSE: BDX) with roughly six months having passed since the completion of the spin-off of its Biosciences & Diagnostics business, which was concurrently combined with Waters Corp. (NYSE: WAT) in a tax-free Reverse Morris Trust (RMT) transaction to better focus on more current and/or upcoming transactions.

For context, since our initial Neutral recommendation (moving to N/A) in early-February 2026 shares of BDX have advanced ~6.5% (underperforming the S&P 500 and Russell 2000 indexes by ~4.5% and ~6.0%, respectively.

No Need to “Gild the Lily”: Upgrade REZI to NEUTRAL (from SELL); Fair Value Remains $20 per share

Recall, on August 4, 2026, Resideo Technologies (NYSE: REZI) completed the tax-free spin-off of 100% of ADI Global Distribution (NYSE: ADIG).

For perspective, shares of REZI have declined ~21.5% relative to its $26.00 per share opening price on the first day of “regular way” trading (versus advances of ~2.5% in both the S&P 500 and Russell 2000 Indexes).

As was mentioned in our earnings note yesterday, we saw no material reason to shift our overall investment thesis; that said, given the more than 20% drop just in yesterday’s post-earnings trading session, which has left the shares roughly in-line with our $20 per share fair value estimate, we think it prudent to temper our overtly negative stance toward a simply more apathetic posture and upgrade REZI shares to NEUTRAL (from SELL).

That said, even at the current price we find it difficult to get overly excited about the company’s near-term prospects, as we think Resideo’s track record of tepid growth warrants the need for tangible proof of execution (i.e., a “show-me” story). Further, we note underlying market dynamics are not currently favorable (e.g., an anemic residential housing end market along with rising input costs), which coupled with spin-related headwinds (e.g., one-time costs and potential dis-synergies) suggest that the subdued outlook articulated by management in yesterday’s conference call is not likely to see a sharp upward revision in the relative near future (e.g., 2H 2026).

More broadly, we also still find Resideo’s long-term strategy somewhat underwhelming/lackluster and maintain that the overarching strategic rationale for the spin-off transaction was relatively weak (i.e., a more short-term focused maneuver).

All told, while we stress there is no change to our overall thesis, the stock’s stark underperformance has left the shares trading at ~8.0x 2027E EV/EBITDA (i.e, the lower-end of its historical range & well-below peers trading in the “mid-teens”) and with just ~2% of implied downside to our $20 per share fair value estimate; in that context, we are also cognizant our initial SELL rating was somewhat of an out of consensus call with the average sell-side price target (including from two bulge bracket firms that have unsurprisingly provided either financing or advisory services to the company) at ~$35 per share (in a range of $27-$45 per share) we see no compelling reason to “gild the lily”, as it were.

Please see our initiation reportdated July 17, 2026, spin-off completion report dated August 4, 2026 and earnings update dated August 13, 2026 for more information.

2Q 2026 Results and Guidance Broadly Support our Initial SELL and NEUTRAL Ratings on REZI and ADIG, respectively; Fair Value Estimates Remain $20 and $24 per share

REZI 2Q26 Earnings: Sales grew ~4% to $695 million, including ~35 basis points (bps) of favorable foreign currency impact, which marked a sharp deceleration from the 9% growth posted in 1Q 2026. Similarly, adjusted EBITDA only grew 6% versus 12% in 1Q 2026. Management flagged input costs and lower volumes from a large OEM Security customer that is pursuing vertical integration as headwinds looking into the second half of 2026.

Further, against the backdrop of former the Resideo CFO opting to pursue his career at ADIG, we view the appointment of Shane Harrison (formerly the CFO of NRC Health – a healthcare technology and analytics company) as his replacement, effective September 1, 2026, in through a somewhat skeptical lens given the lack of industry-specific/industrial background. Based on the ~6% rally into last night’s print, we think investors are seriously underpricing near-term market dynamics and the risk of AI competition on the company’s growth trajectory. Thus, we reiterate our SELL rating and $20 price target.

ADIG 2Q26 Earnings: While ADIG’s revenue growth decelerated to 1% year over year (compared with 8% in 1Q26), we note the difficult prior-year comparison as well as the sequentially positive trend in adjusted EBITDA, which was down 6% year-over-year versus down 8% in 1Q26. By all accounts, commercial demand remains “resilient” whereas residential AV continues to be “softer than [ADI] anticipated”. Management highlighted $80 million in annualized gross savings by end of 2027 as the modern ERP platform is now fully implemented. That being said, ADIG expects a $6 million gross margin headwind in 2H 2026 from inventory and supplier transitions.  All told, we do not really see anything that materially shifts our initial thesis but continue to highlight the potential for margin compression as suppliers gain greater bargaining power over ADI (given the reduction in scale) as a risk. As such, we reiterate our NEUTRAL rating and $24 price target.

Analyzing the results as a whole, 2026 revenue guidance was implicitly revised upwards by ~$5 million, but adjusted EBITDA guidance was lowered by $60 million, at the midpoint. In our view, the delta lies primarily with REZI as ADIG’s adjusted EBITDA performance has, on a standalone basis, improved at least from a second-derivative perspective.

Top-Line Results & Guide were a bit soft but the FCF Forecast was Maintained along with an Increase to the Mid-Point of the Adj. EPS and EBITDA Outlook; Fair Value Remains $30 per share so we Recommend Leaning into any Pullbacks with Double-Digit FCF Growth Projected for F2027, implying a better than 10% yield, and Leverage set to be below 3.0x by the end of F2026

Amentum Holdings (NYSE: AMTM) posted 3Q F2026 results with sales down ~2% to $3.49 billion (versus consensus of $3.579 billion), in large part driven by a ~3% drag from divestitures and the un-consolidation of joint ventures (i.e., actually up 1% on a normalized basis). GAAP operating income rose 67% to $172 million (compared with consensus of $168 million) while adj. EBITDA rose ~6% to $290 million (versus consensus of $282.2 million) on a margin of 8.3%.  GAAP net income and EPS were $66 million and $0.27, respectively (compared with $10 million and $0.04 in the prior year period).  Adj. EPS and free cash flow (FCF) rose 20% and 35%, respectively, to $0.67 and $135 million.

Backlog, at quarter end, was $48.2 billion, up ~18% year over year, implying a TTM book-to-bill of 1.3x (and 1.1x on a quarterly basis) with the funded backlog up ~10% to $6.2 billion.

The company ended 3Q F2026 with a net leverage ratio of 3.0x (versus 4.1x at the end of F2024 and 3.2x at the end of F2025); the company remains on track to end F2026 with a leverage ratio of less than 3.0x (more specifically 2.8x, by our calculation), which is a threshold management has consistently pointed to as a level where its flexibility to pursue increased shareholders returns emerges, primarily via share repurchases and accretive tuck-in acquisitions while also continuing to further reduce leverage.

In terms of guidance (see Exhibit 1 on page 2), AMTM modestly reduced its full-year F2026 sales forecast to $13.8-$13.95 billion (down from its previous outlook of $13.95-$14.30 billion and compared with prior consensus of $14.14 billion) with adjusted EBITDA and EPS of $1.115-$1.140 billion and $2.40-$2.50, respectively (up from the prior guides of $1.1-$1.14 billion and $2.25-$2.45).  Free cash flow guidance was maintained at $525-$575 million (or ~$2.25 per share at the mid-point).

Looking into F2027, AMTM anecdotally provided some initial context by signaling that GAAP sales will be flat to up 1%, reflecting a ~3% drag from insourcing initiatives at NASA as well as the proactive de-selection of lower margin work offset by underlying growth in the mid-single digits; the adj. EBITDA margin is projected to expand ~20 basis points.  Adjusted EPS is expected to grow at a mid-single digit clip, and free cash flow is expected to advance ~10%, implying FCF of $577.5-$632.5 million (or ~$2.35-$2.60 per share, by our calculation).

Over the medium-term, management has previously laid out a framework that calls for compound annual top-line growth of 4%-6% (off a ~$14 billion base in F2025) through F2028E, implying sales, by our calculation, of $15.75-$16.67 billion, with an adjusted EBITDA CAGR of 6%-8%, implying adj. EBITDA of $1.34-$1.42 billion and cumulative free cash flow generation of $1.27-$1.33 billion in F2027E-F2028E (see Exhibit 2 on page 3).

Given the modest top-line reduction, we would expect the knee-jerk reaction likely portends modest weakness in today’s trading session, particularly against the backdrop of a relatively strong run since our initial recommendation (i.e., the stock is up 19% since mid-July, outperforming the S&P and Russell by 16.5% and 17.5%, respectively); that said, we think any pull-backs present the opportunity to initiate and/or add to positions as the stock continues to trade at a stark discount to peers and we think the on-going free cash flow story remains underappreciated by the market (see Exhibit 3 on page 3).

Our fair value estimate (FVE) remains $30 per share, reflecting a ~8.5x multiple on F2027E EBITDA, implying a ~12x FCF multiple, as well as projected net debt (see Exhibit 4 on page 4).

Supply chain constraints, a known issue lingering back from 1Q 2026, prompt a post-spin 2026E guidance reset; Shares likely to see pressure but we think that with the near-term outlook formally de-risked (and the medium-term roadmap maintained) longer-term investors can purchase shares at a relatively attractive/discounted multiple of 13x EBITDA, 16.5x EPS and a FCF yield of ~5%

Recall, Honeywell Aerospace (NASDAQ: HONA) was spun-off, tax-free, from Honeywell Technologies (NASDAQ: HON) on June 25, 2026. HONA shares, not unexpectedly, experienced a degree of initial weakness (down ~11.5% versus a ~1% rise in the S&P 500 and a ~2.5% decline in the Russell 2000) in regular-way trading prompting our upgrade (see the note dated July 24, 2026) albeit with the cognizance that the first reported quarter, in our experience, broadly tends to be “ugly” for SpinCos.

That said, 2Q 2026 results were decidedly disappointing even beyond our previous contemplation as supply chain issues, which weighed on 1Q 2026 results (i.e., not a total unknown to both management and investors) drove below consensus results for the June-quarter as well as a re-set of full-year 2026E guidance (see Exhibit 1).  That said the long-term guidance framework (i.e., 2025-2028E) that management laid out at its investor day (in early June 2026) remains intact.

In that context, HONA posted 2Q 2026 sales up ~5% to $4.52 billion (compared with consensus of $4.57 billion), reflecting growth of 6% and 8% at Commercial OEM & Aftermarket, respectively, and ~3% growth in Defense & Space.  Adjusted EBIT was down ~7% to $995 million, including ~$100 million in separation & inventory-related costs, while adj. EBITDA was, by our calculation, down less than 1% to $1.138 billion (versus consensus of $1.172 billion).  Adjusted EPS were $1.87 (compared with consensus of $1.98 and $2.75 per share in the prior year period).  Backlog grew ~9% to $18.2 billion and the company ended the quarter with a book-to-bill of 1.1x.

For full year 2026E, current trends along with a less resilient outlook for the company’s supply-chain issues, precipitated a reduction in management’s outlook, which now calls for 2026E consolidated organic sales growth of 4%-5% (down from 7%-9%) with adj. standalone EBIT of $4.35-$4.45 billion (previously $4.65-$4.75 billion) and adj. EPS of $7.60-$7.90 per share (versus consensus of ~$8.40 per share).  Notably, free cash flow (FCF) in the back-half (i.e., 2H 2026) is still expected to be $1.0-$1.5 billion (or ~$3.95 per share).

Despite the near-term guidance reset management backed the medium-term (i.e., 2025-2028E) targets it laid out at its investor day in June 2026, which called for consolidated annual top-line growth of ~6%-8% (see Exhibit 2), driven by mid-to-high single digit growth in both the commercial OE market and commercial aftermarket (AF), supported by aging fleets, and multi-year backlogs among both commercial & business customers (i.e., ~$18.2 billion at the end of 2Q 2026), while defense & space is expected to grow at a mid-single digit rate as national defense spending has become a higher priority globally in the current geopolitical environment (e.g., Canada, Germany, India, Japan, Turkey & the U.K. all significantly ramping spending).  Adj. EBIT is expected to grow at a faster rate than sales, at ~9% in 2025-2030E primarily driven by volume/mix, price/cost & productivity, implying ~$6.5 billion in adjusted EBIT in 2030E and an adj. margin of ~25.5%-28.0%. 

Free cash flow is expected to grow at an even faster clip than EBIT at a rate of ~10% annually, implying total free cash flow of ~$4.0 billion in 2030E (i.e., on an aggregate rather than cumulative basis). Company-funded (as opposed to customer-funded) research & development (R&D) costs are expected to be >4% of sales (slightly above its 3-year average) while maintenance capital spending is projected to be ~1%-2% of sales, which we think in tandem support a solid pipeline of next-generation avionic, engine & communication systems as well as emerging advanced air mobility (AAM) capabilities, such as electric vertical takeoff & landing (eVTOL) & urban air mobility. 

Clearly, this was an inauspicious start to HONA’s standalone reporting history, in that it likely damages management’s credibility to some degree right out of the gate, which coupled with the more back-end weighted (i.e., non-linear) cadence for the acceleration in its out-year results, will undoubtedly weigh on shares (which, we note, had traded up since our upgrade but by all indications will end-up trading a modest discount by end of today’s trading session).

That said, we do think the long-term backdrop for HONA’s global platform given its sector/market exposures, growing backlog as well as the fact that high-margin, recurring MRO/aftermarket work, of which ~70% is subject to long-term contracts, should exceed 50%-55% of sales over the next decade, lends credence to management’s aspirations of achieving ~$30 billion of sales (10-years out), although we discern this target likely includes a modicum of tuck-in M&A activity.

Regarding the accretive deployment of projected free cash flow which we estimate could be ~$15 billion (on a cumulative basis) in 2H 2026E-2030E, the company intends to maintain a disciplined capital allocation paradigm, focused on investing in organic growth opportunities/innovation, which will complimented by strategic tuck-in acquisitions (aimed at adding technology capabilities or expanding its global footprint into attractive markets) as well as returning capital to shareholders.  On the latter front, the company intends to institute a “competitive” (but as yet undefined) dividend and engage in opportunistic share repurchases. All that said, the company targets the maintenance of a 2.5x leverage ratio over the medium term (modestly above the group average, which is closer to 1.5x, by our calculation).

All told, we think the re-set in management’s near-term guidance has, to some degree de-risked the stock, and presents long-term holders a reasonable entry point into an evolving but world-class aerospace & defense business at ~13.0x 2027E EV/EBITDA, 16.5x 2027E EPS and a free cash flow yield of ~5% (each discounts to peers, even at the low-end); thus, we maintain our BUY rating albeit with a tempered price target of $230.50 per share (see Exhibit 3).

Please see our initiation reportdated June 12, 2026 and updates dated June 29, 2026 and July 24, 2026, for more information.

Residio completes the Spin-Off of ADI Global Distribution; Both Standalone Companies will remain in the S&P SmallCap 600; Initiate Post-Spin Coverage of REZI and ADIG at Sell & Neutral, respectively, with Fair Value Estimates of $20 and $24 per share

Distribution: On August 4, 2026, Resideo Technologies (NYSE: REZI) completed the tax-free spin-off of 100% of its distribution business, ADI Global Distribution (NYSE: ADIG). Shareholders of record received one share of ADIG for every two shares owned of REZI; fractional shares were paid out in cash. As part of the transaction, REZI repaid $900 million of outstanding principal under its Term Loan B credit facility and expects to repay another ~$200 million by end of 3Q 2026 under the separation agreement with ADIG. Resideo’s outstanding Series A Cumulative Convertible Participating Preferred Stock was reduced by 150k to 350k. REZI and ADIG expect to report 2Q 2026 earnings on August 12, 2026 and August 13, 2026, respectively.

Regular-way Trading & Indexation: Shares of ADIG (as well as post-spin REZI) commence so-called “regular way” trading this morning. Resideo Technologies will maintain its place in the S&P SmallCap 600 Index while ADI Global Distribution will also join the same index (replacing Hertz Global Holdings (NYSE: HTZ) as of today’s market open.  To that end, we see the potential for any substantive specifically index-related dislocations as being relatively low.

When-issued Trading: Given the extremely anemic trading volumes for both REZI-W and ADIG-W, we do not read very much into initial trends and simply use those trading indications as a basis for determining the relative return versus our initial valuation scenarios. In that context, REZI-W traded between $23.40-$25.00 while ADIG-W traded between $20.12-$22.06 on volume of less than 15k shares.

Pre- & Post-spin Recommendations: Following our initial pre-spin SELL recommendation earlier this month, shares of consolidated REZI declined ~2.0% (underperforming the S&P 500 and Russell 2000 by ~3.9% and ~2.7%, respectively). In all honesty, we consider the stock to have been more resilient relative to our initial expectations despite moving in the “correct direction” (steadily moving down with progressively lower peaks on their rebound). The delta, in our view, lies in: 1) an underappreciation of the “pointless transaction” story; and 2) strength in momentum trading around “optimistic” outlooks on future interest rate moves (despite the current rate environment being seemingly too restrictive to be overtly conducive to the overall housing industry).

On a post-spin basis, we reiterate our fair value estimate of $20 per share (18.9% implied downside) and $24 per share (8.7% implied upside) for Resideo Technologies and ADI Global Distribution, respectively. As such, we initiate post-spin REZI at SELL and ADIG at NEUTRAL. To be sure, our overall view has not materially changed since our initial report. To that end, while we think management is likely to strike an upbeat tone during 2Q earnings, we recommend investors focus on the quantitative versus the qualitative in this case. In particular, we will be keenly watching for any signs of risk from AI competition to post-spin REZI, which could be a potential negative catalyst.

Please see our initiation reportdated July 17, 2026 for more information.