CON Completes the Separation AMVO; Maintain Post-Spin NEUTRAL Ratings

On September 18, 2025, Continental AG (CON GR) completed the tax-free separation (on a one-for-two basis) of 100% of its Automotive Technology supply business, which is named Aumovio and will trade on the Frankfurt Stock Exchange under the ticker AMVO, from its core Tires business, which will continue to trade under its previous ticker (as well as maintain its current domicile).

Early trading appears to be relatively orderly with initial indications pointing to the respective standalone companies debuting at ~€55.50 per share for the post-spin parent, a modest discount to our ~€60 per share fair value estimate (FVE), and ~€35 per share for post-spin AMVO, roughly in-line with our FVE (see Exhibits 3 & 4 on page 3). In that context, while we continue to think the separation will improve the strategic clarity of both entities, with Aumovio offering investors exposure to a high-growth, tech-driven automotive supplier with margin improvement potential, albeit with higher execution and macro risks, and post-spin CON providing a more stable, cash-rich profile anchored by premium tires and improving industrial margins as well as the expectation of enhanced returns and capital distributions, our initial investment recommendation remains NEUTRAL given the limited upside potential currently implied (relative to our fair value estimates). That said, we will actively monitor shares for any early volatility/dislocations that could present a potentially more attractive long-term entry point.

Please see the European Special Situations Report dated August 14, 2025, for more information.

Close Coverage/Withdraw Recommendation of WDC (formerly BUY), Effective as of Today’s Close, with Shares Trading Roughly In-Line with our FVE Following Steep Price Appreciation in Recent Months & Our Coverage Mandate Having been Eclipsed

Recall, Western Digital Corp. (NASDAQ: WDC) completed the tax-free separation of Sandisk (NASDAQ: SNDK) in late February 2025; since that time (amid our initial Buy rating), shares have appreciated ~77% (outperforming the S&P 500 and Russell 2000 by ~70% and ~69%, respectively).

That said, with the shares trading roughly in-line with our $88 fair value estimate and considering the time elapsed since the transaction has exceeded our coverage mandate we prefer to remain disciplined and drop coverage/withdraw our recommendation, effective as of today’s close.

For context, our current/previous fair value estimate (FVE) was based on a 13.5x multiple on F2026E adj. EPS of ~$6.50 (see Exhibit 3 on page 3). Please see the Spin-Off Report dated February 5, 2025 and Updates from 2/13/2025, 2/24/2025 and 7/31/2025 for additional information.

Close Coverage/Withdraw Recommendation of SNDK (formerly BUY), Effective as of Today’s Close, with Shares Trading Roughly In-Line with our FVE Following Sharp Price Appreciation in Recent Months/Weeks & the Timeline of our Coverage Mandate Having been Eclipsed

Recall, Sandisk Corp. (NASDAQ: SNDK) was spun off from Western Digital (NASDAQ: WDC) in late February 2025; for context, despite our opening Neutral rating shares garnered a degree of initial strength in early trading before reversing amid both technical factors (i.e., S&P 500 versus the S&P as well as economic uncertainty & tariff concerns, which collectively drove the stock down ~36.5% (underperforming the S&P 500 and Russell 2000 by ~26% and ~21.5%, respectively) prior to the upgrade of our recommendation to Buy in mid-April, which was predicated on the broad thesis that the tangible impact of tariffs was overstated (considering its two main geographic suppliers are Japan & Malaysia along with the latent potential for exemptions and the fact a substantial portion of SNDK’s business was generated outside the U.S.) as well as that given the secular demand trends and underlying competitive environment the industry’s supply/dynamic (i.e., pricing) was unlikely to see a material deterioration (see the upgrade note dated 4/14/2025 for more information).

Since our recommendation, shares have rebounded/appreciated roughly 100% (outperforming the S&P 500 and Russell 2000 by ~83.5% and ~75.5%, respectively) amid a mitigation of tariff concerns/seemingly favorable changes to export rules, solid 3Q & 4Q F2025 results as well as increased investor confidence in the likelihood/sustainability of a favorable supply/demand environment within the Flash industry.

In that context, with shares trading roughly in-line with our $60 per share fair value estimate (FVE), leaving us hesitant to recommend new capital, as well as the passage of our coverage mandate, in terms of the time elapsed since the transaction, we close coverage/withdraw our recommendation of SNDK, effective as of today’s close.

For context, our current/previous fair value estimate of $60 per share was based on F2026E sales of ~$8.4 billion and a 10.0x multiple on F2026E adj. EPS of ~$6.02 (see Exhibit 4 on page 3). [Note: estimates will no longer be updated/relied upon going forward.]

Please see the Spin-Off Report dated February 5, 2025 and Updates from 2/13/2025 & 2/24/2025, 4/14/2025 and 5/8/2025 for additional information.

The Kraft Heinz Co. (KHC) to Separate, Tax-Free, Into Two Publicly Traded Companies in 2H 2026  

On September 2, 2025, before the market open, The Kraft Heinz Company (NASDAQ: KHC), a global packaged food company, announced plans to separate into two, independent, publicly traded companies, currently named “Global Taste Elevation Co.” & “North American Grocery Co.” as placeholders, in a tax-free spin-off transaction that is expected to be completed in 2H 2026, subject to customary conditions including final Board approval (which is a group that we would note approved this measure unanimously).  For context, KHC, which was formed via the merger of Kraft & Heinz in 2015, announced a strategic review of its operations in May 2025.

In terms of rationale, which we would anecdotally note was met with a degree of skepticism on this morning’s conference call as it seemingly unwinds many of the purported synergies (most notably scale) underpinning the original combination back in 2015, the separation is aimed at reducing operational complexity within the company’s sprawling portfolio and improving management focus to the benefit of growth, margins and capital allocation. On the latter front, management expects both standalone companies to generate “ample discretionary cash flow”, which will facilitate organic growth initiatives, capital returns to shareholders, opportunistic M&A as well as the maintenance, in aggregate, of the current dividend level.  On the capital structure front, while more granular details will be forthcoming management expects both entities will maintain “investment grade” credit ratings (although it seems that the Taste Elevation business, at least in the aggregate, will likely retain a larger portion of the KHC’s existing indebtedness).

Currently, the company reports results in three geographically focused segments: 1) North America (75.5% of consolidated sales and 85.5% of adj. operating income in 2024); 2) International Developed Markets (13.5% of sales and 9% of adj. operating income); and 3) Emerging Markets (11% of consolidated sales and 5.5% of adj. operating income).  That said, the impending split contemplates two independent concerns (whose names are, again, to be determined): 1) Global Taste Elevation, which generated ~$15.4 billion of sales and ~$4.0 billion in adj. EBITDA in 2024 and will be primarily focused on so-called shelf-stable “sauces, spreads and seasonings” with well-known brands such as Heinz (e.g., ketchup & mustard), Philadelphia (i.e., cream cheese) and Kraft Mac & Cheese; and 2)  North American Grocery Co., which generated sales of ~$10.4 billion and adj. EBITDA of ~$2.3 billion in 2024, which will be led by current KHC chief executive Carlos Abrams-Rivera and focus on a portfolio of billion-dollar brands, including Oscar Mayer (i.e., packaged meats), Kraft Singles (i.e., cheese) and Lunchables (i.e., packaged meals). 

Anecdotally, on this morning’s conference call management intimated that the Taste Elevation business is likely to grow at a rate toward the upper-range of the company’s long-term top-line growth target of 2%-3% while North American Grocery should experience “very” low-single digit top-line growth over the long-term (although the company intends to provide more details at an investor event prior to the transaction’s completion).  Management expects roughly $300 million of dis-synergies associated with the separation albeit with “clear opportunities” to “mitigate a substantial portion” of those cost in “the near term”

In terms of near-term guidance, the company has previously provided a consolidated 2025E outlook calling for a full-year organic net sales decline of 1.5%-3.5% with constant currency adj. operating income down 5%-10% (notably, this outlook includes the impact of lapping lower variable compensation in 2024, which is an approximate 150 basis point headwind, as well assuming an adj. gross profit margin that is expected to compress ~25-75 basis points).  Adjusted EPS is projected to be $2.51-$2.67 assuming an effective tax rate of ~26%, representing a ~$0.23 headwind year-over-year. (Anecdotally, the increase in the effective tax rate is primarily driven by the impact of several countries enacting the global minimum tax regulations, which are partially offset by the annual go forward benefit related to the transfer of business operations that were completed in 4Q 2024.) Interest expense is expected to be ~$960 million with other expense/(income) of (~$230) million for the full year 2025E. Free cash flow (FCF) is projected to be roughly flat versus the prior year, implying a conversion rate of at least 95%.  (Anecdotally, KHC’s FCF outlook reflects working capital efficiencies and lower cash outflows for variable compensation, partially offset by higher cash taxes, which, again, are primarily driven by the impact of several countries enacting the global minimum tax regulations.)

In terms of valuation, Kraft Heinz (KHC) could be compared with, among others, The Campbell Soup Co. (NASDAQ: CPB), Conagra Brands (NYSE: CAG), General Mills (NYSE: GIS), Hormel Foods (NYSE: HRL), and The J.M. Smucker Co. (NYSE: SJM), which, on average trade at 10x 2026E EV/EBITDA (in a range of ~8x-13x).  Applying a slightly discounted blended multiple of ~9.0x (i.e., 9.5x & 8.5x based on margin disparities) to projected 2026E adj. EBITDA implies total segment value of ~$55 billion.  Accounting for projected net debt yields a total value of $35.5 billion or ~$30 per share (based on a diluted share count of 1,185 million).

Per an internal survey, UHAL’s core equipment rental business continues to dominate the 20’-22’ one-way truck market and remains the increasingly clear leader in the more competitive 10’-16’ markets

With the back-to-school season upon us, we thought it might be an interesting exercise to re-evaluate a snapshot of the do-it-yourself (DIY) moving market’s competitive landscape. To that end, we simulated 20 potential moving transactions of theoretical students returning to college/university.

Objectively, we think the results broadly support our contention that UHAL’s core truck rental offering has durable competitive advantages in what we discern are the main factors of differentiation, namely the availability of equipment, the proximity of rental locations, and price.

First, our survey confirmed that U-Haul’s primary competitors in the one-way/inter-city box-car market are Budget and, to a far lesser degree, Penske (as other players such as Enterprise & Ryder only offer intra-city/round-trip moves).

Next, in the market for 20’-22’ trucks, which are designed for two-to-three-bedroom moves, we observed that U-Haul was the “clear” or “likely” choice in ~95% of the transactions we contemplated (see Exhibits 3 & 4).

On the smaller (and more common) end of consumer equipment sizes, specifically the markets for 10’-12’ and 15’-16’ trucks (designed for studio to one-to-two-bedroom moves), the industry is decidedly more competitive, particularly between U-Haul and Budget, with the latter more likely to compete on price. Still, in the 20 markets we surveyed, the participants, on average, indicated U-Haul was the “clear” or “likely” choice in ~60% of transactions (in a range of 50%-70%) and a “reasonable” choice for the consumer in ~80% of the potential transactions (in a range of 70%-100%; see Exhibits 3 & 4).

From a comparative perspective, we conducted an identical survey in August 2018 (albeit with a larger pool of respondents in this iteration) where the results indicated U-Haul was the “clear” or “likely” choice in the 20’-22’ market for 90%-95% of the transactions (see Appendixes 1-2 on pages 7-8). In the 10’-16’ market, we discerned U-Haul was the “clear” or “likely” choice in 40%-45% of the transactions and a “reasonable” choice in ~60% of the transactions, which, all told, suggests to us that while the competitive environment has not tectonically shifted U-Haul has seemingly extended its lead against the competition.

All told, it remains our view at ~7.5x F2027E EV/EBITDA UHAL is undervalued relative to the sum value of its parts, which includes the leading/dominant equipment rental business as well as a high-margin/low-incremental-capex self-storage business (which as a standalone would be the industry’s 3^rd largest player).  Our fair value estimate remains $76.50 per share (see Exhibit 1).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

KDP to Acquire JDE Peet’s & Subsquently Split into Two U.S. Listed Companies in Late-2026     

On August 25, 2025, Keurig Dr Pepper Inc. (NASDAQ: KDP), a North American beverage company, agreed to purchase JDE Peet’s N.V. (JDEP NA) in cash for €31.85 per share, representing an equity value of €15.7 billion and a ~33% premium to JDEP’s 90-day volume weighted average price (VWAP).  The purchase price, which will be unaffected by JDEP’s previously declared dividend of €0.36 per share, represents a 2026E EV/EBITDA multiple of ~12.9x (or a 10.5x multiple post ~$400 million of synergies expected to be realized over 3-years).  The transaction, which has the committed support of JAB Holdings who controls ~69% of the JDEP, is expected to close in 1H 2026.

As soon as practically feasible following the merger (i.e., late-2026), the combined company intends to separate into two independent, publicly traded companies via a tax-free spin-off (subject to customary conditions): 1) Beverage Co., which will operate well-known brands, such as Dr Pepper, A&W, Canada Dry, 7-Up, Snapple, Mott’s and Penafiel; and 2) Global Coffee Co., which will combine KDP’s single-serve coffee brands, Keurig & Green Mountain, which is a category leader in North America, with JDE Peets’s long-established portfolio of brands, particularly in Europe, including Peet’s, L’OR, and Jacobs.  The standalone Beverage business, which operates in the ~$300 billion global beverage industry and will be helmed by current KDP CEO Tim Cofer, is expected to generate sales of ~$11 billion with adj. EBITDA of ~$3.3 billion (on a trailing twelve-month basis ending June 2025) and post mid-single digit net sales growth along with adj. EPS growth in the high -single digits while the Global Coffee Co., which is expected to be the top-player (i.e., #1) in the ~$400 billion global coffee industry and will be led by KDP’s current CFO Sudhanshu Priyadarshi, is projected to generate ~$16 billion in June-ending TTM sales and ~$3.1 billion of pre-synergy adj. EBITDA. 

Post-merger, KDP expects to maintain an investment-grade credit rating and a leverage ratio of ~5.25x by the end of 2026 (compared with ~3.3x at the end of 2Q 2025).  Post-spin, both the Beverage & Coffee companies are also committed to garnering investment grade credit profiles. (That said, analysts at the rating company S&P have signaled the potential of a one-step downgrade to BBB- following the announcement of this “complex, two-step transaction”.  That said, in all fairness we would point out that in the three years following KDP’s 2018 purchase of Keurig Green Mountain the company reduced its leverage ratio from ~6.0x to slightly less than 3.0x in 2021.)

Beyond the standard rationale of enhanced focus & operational flexibility, optimized capital structures & allocation policies the transaction, at least in management’s view, is a complementary fit that creates a scaled, global leader (i.e., #1) in the Coffee sector with the expectation for robust shareholder returns in the form of buybacks & dividends while the Beverage business will remain focused on growth through innovation and acquisitions while also paying out a “competitive” dividend and engaging in “opportunistic” share repurchases. 

In terms of valuation, the Beverage & the Coffee Cos., compete with a range of companies, including Coca-Cola (NYSE: KO), PepsiCo (NASDAQ: PEP), Starbucks (NASDAQ: SBUX), J.M. Smucker (NYSE: SJM), Kraft Heinz (NASDAQ: KHC), and Nestle (NESN SW), which trade at ~14x 2026E EV/EBITDA (in a range of 9.5x-19.5x), while ancillary peers in the sector, excluding predominantly alcohol-focused concerns, could include Campbell’s Soup, Danone SA, Hershey, Kellanova (NYSE: K), which is the process of being purchased by privately-held Mars, Inc. for ~16.4x TTM adj. EBITDA, McCormick & Co. (NYSE: MKC) and Monster Beverage Corp. (NASDAQ: MNST), which trade at ~14.5x (in a range of 10x-21.5x).    

Applying a blended multiple of ~13.0x EV/EBITDA to 2026E EBITDA (i.e., 13.5x for Beverage and a ~12.5x multiple for Coffee) implies values of ~$47 billion and nearly $40.5 billion, respectively. Accounting for projected net debt yields a preliminary, base case, sum-of-the-parts valuation of ~$49 billion or ~$36 per share (based on a diluted share count of ~1.36 billion).

RAL Reports 2Q 2025 Results; Sets 3Q 2025 Guidance & Declares a $0.05 Quarterly Dividend; Lower FVE to $54 (from $62) & Maintain NEUTRAL Despite Early Signs of a Potential Bottom Emerging at the T&M Segment

Last night, after the market close, Ralliant Corp. (NYSE: RAL), which completed its tax-free separation from Fortive Corp. (NYSE: FTV) in late-June 2025, reported 2Q 2025 results, its first as a standalone public-company, showing consolidated sales down ~6% to $503 million, in-line with management’s previous commentary indicating 2Q 2025E sales would be down in “mid-single digits”, with sequential sales growth of ~4%. Adjusted EBITDA, EPS and FCF of $99 million (on a margin of 19.8%), $0.67 and $74 million (on a 98% conversion ratio), respectively. 

By segment, Sensor & Safety Systems (S&S) segment sales were up ~1% (2% organically) year-over-year to $311 million with adj. EBITDA up ~4% to $88 million (on a margin of 28.4%) while Test & Measurement (T&M) segment sales fell 15% (17% organically) to $193 million with adj. EBITDA down ~65% to $17 million (on a margin of 9.1%).  On a sequential basis, S&S sales were up 6% while T&M sales increased (quarter-over quarter) by ~2%. 

The company ended 2Q 2025 with net of ~$1.0 billion, including cash of $199 million and debt of $1.15 billion, and a leverage ratio of 1.9x (within the company’s targeted range of 1.5x-2.0x).  Notably, RAL expects a $90 million payment to its former parent (or the IRS) in 3Q 2025.

In terms of the outlook, the company articulated 3Q 2025E guidance calling for consolidated quarterly sales of $513-$527 million, an adjusted EBITDA margin of 18%-20% and adj. EPS of $0.54-$0.60. (Anecdotally, the company indicated it may revisit its guidance practices at year-end 2025, seemingly eyeing the additional disclosure of annual expectations although management did comment that historical seasonality suggests the distribution of results is generally weighted 48%/52% between 1H/2H in any given year.)

Interest expense is projected to be $16-$18 million in 3Q 2025E with an adj. tax rate of 17%-19% and a diluted share count of 113 million. On a go-forward annual basis, corporate costs are projected to be ~$50-$55 million (compared with previous commentary suggesting closer to ~$45 million).

Anecdotally, the company is launching a cost savings initiative aimed at reducing $9-$11 million of spin-related dis-synergies (primarily at T&M), of which ~$4 million is expected to be achieved, at least on a run-rate basis, by 4Q 2025.  Importantly, the company expects these cost reduction efforts will contribute to adj. margin expansion at T&M beginning in the September-ending 3Q 2025.  All told, management commentary suggests that 2Q 2025 could represent the nadir at T&M from both a top-line and margin perspective although we would note that while management remains “cautiously optimistic” it stressed on this morning’s conference call that the environment remains volatile (and that one quarter of data points does not a trend make). 

Additionally, in early August 2025, RAL announced that its Board had approved a $0.05 per share quarterly cash dividend payable on September 23^rd (for shareholders of record on September 8^th). 

In terms of valuation (formerly FTV’s Precision Technologies business), the Test & Measurement segment is likely most closely compared with Keysight Technologies (NYSE: KEYS), which trades at ~16.5x 2026E EV/EBITDA and ~20.5x 2026E EPS, along with Teradyne Inc. (NASDAQ: TER), Ametek, Cognex (NASDQ: CGNX), and Teladyne while the Sensor & Safety Systems segment could be compared with  Amphenol Corp. (NYSE: (NYSE: APH), Emerson Electric Co. (NYSE: EMR), which outbid Fortive to acquire National Instruments (formerly NASDAQ: NATI) for ~$8.2 billion or about 21.5x pre-synergy EV/EBITDA in October 2023, Esco Technologies (NYSE: ESE), Honeywell (NASDAQ: HON), Sensata Technologies (NYSE: ST) and TE Connectivity (NYSE: TEL), which trade at ~14.5x 2026E EV/EBITDA, and, at least as it relates to the PacSci business, L3Harris Technologies (NYSE: LHX), RTX Corporation (NYSE: RTX), and TransDigm Group (NYSE: TDG), which trade at ~16.5x 2026E EV/EBITDA.

Our fair value estimate (FVE) for post-spin Ralliant Corp. (NYSE: RAL) is revised to $54 per share (from $62 per share) reflecting a ~15.5x 2026E EV/EBITDA multiple (or ~20.5x 2026E EPS) and accounting for corporate costs and projected net debt (see Exhibit 1 on page 3).

Please see the Spin-Off Report dated June 12, 2025, and Updates from June 30, 2025, for more information as well as the Reference section on pages 5-6.

NPKI reported solid 2Q 2025 results & modestly raised full-year guidance for 2^nd time this year; ended 2Q 2025 with net cash despite repurchasing 3% of shares in 1H 2025; fair value estimate increased to $10 per share (from $9.50)

Last night, after the market close, NPK International (NYSE: NPKI) reported 2Q 2025 results with sales from continuing operations up ~2% to $68.2 million (versus consensus of $56.7 million), driven by strength in demand for rentals of its core-composite matting products (particularly among utility & critical infrastructure customers).  Adj. EBITDA rose 5% and $18.8 million on 70 bps of margin expansion to 27.5% while EPS were $0.10 (compared with consensus of $0.09 and $0.12 in the prior year quarter. [Note: NPKI changed its corporate moniker from Newpark Resources (old ticker NR) in December 2024 following the sale of its Fluid Systems (or oil field services) business and, more recently, in late-May 2025 successfully changed its Global Industry Classification Standard (GICS) classification to Industrials/Capital Goods/Trading Companies & Distributors (from oil field services).]

The company ended 2Q 2025 with net cash of $16.7 million, including ~$26 million of cash and ~$9.3 million of debt.  Notably, the company repurchased ~1% of the outstanding shares during the June-quarter (following a ~2% buyback in 1Q 2025).   For context, NPKI has ~$92.5 million remaining on a $100 million buyback authorization (which at current prices equates to ~12% of the outstanding shares).

In terms of guidance (see Exhibit #1 on page 2), management increased its full-year 2025E outlook, which currently calls for full-year 2025E sales of $250-$260 million (up from its previous and initial guides of $240-$252 million and $230-$250 million, respectively) with adj. EBITDA of $68-$74 million (up from its previous and initial targets of $64-$72 million and $60-$70 million, respectively.  Capital spending is still expected to be in the $35-$40 million range, of which ~80% will be deployed toward the expansion of the composite matting rental fleet (where we note investments have historically garnered 25%-plus cash-on-cash returns).  For context, NPKI expanded its rental fleet by 5% in 2Q 2025(and ~8% in 1H 2025), which follows a ~14% expansion in 2024.

Anecdotally, on this morning’s conference call, NPKI indicated that its full-year 2025E sales outlook assumes underlying rental growth in the “high-teens to low-20%s” range with products sales up “~10%-15%”.

Longer-term, the company remains bullish on the durability of demand within its utility/transmission and critical infrastructure verticals as well as its ability to continue expanding geographically as well as gain share (i.e., early indications suggesting that the company’s wood & stone competitors are increasingly buying composite matting from NPKI given the on-going shift in customer preferences).

As well, in the context of the Fluid Systems sale, the corporate name change and the recent GICS reclassification, we continue to think NPKI’s stock remains in the process of re-rating toward a valuation more in-line with specialty rental & services peers as opposed to a legacy oilfield services provider (i.e., high single-digit to low double-digit multiples versus low- to mid-single digit-type valuations); to that end, the company is currently positioned as a pure-play provider of work access solutions (most notably via its DURA-BASE composite matting, which we think will continue to displace legacy wood & stone options) focused on the global critical infrastructure complex, including the utility & energy transmission markets.  

Our base case fair value for NPKI (formerly NR) is modestly increased to $10 per share (from ~$9.50 per share) based on a 10.5x multiple on 2026E adjusted EBITDA of ~$79 million (previously $75.5 million), while accounting for corporate costs and projected net debt/cash (see Exhibit #2).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

WDC Reports Solid 4Q F2025 Results & 1Q F2026E Guidance in part due to AI’s Impact on Nearline HDD Demand; Fair Value Estimate (FVE) is Increased to $77 per share

Last night, after the market close, Western Digital Corp. (NASDAQ: WDC), which completed the tax-free separation of Sandisk (NASDAQ: SNDK) in February 2025, reported 4Q F2025 results demonstrating sales up 30% year-over-year (and 14% sequentially) to $2.605 billion (versus consensus of $2.457 billion) with adjusted EPS of $1.66 (versus consensus of $1.47), which were up ~22% sequentially. The gross margin expanded 610 basis points (bps) year-over-year & 120 bps sequentially to 41.3% while free cash flow (FCF) totaled $625 million (up 139% YoY and 55% sequentially).

Anecdotally, the company benefited from strong (and in management’s view sustainable) demand for its nearline HDD products during the quarter, in part driven by the rise of artificial intelligence (AI) models and their favorable impact on the demand for unstructured data storage. 

Following its recent debt to equity exchange, the company ended the quarter with net debt of ~$2.6 billion, including $2.1 billion in cash, and a leverage ratio at the low end of the company’s 1.0x-1.5x.  During the quarter, the company authorized $2.0 billion of share repurchases, of which the company exercised $149 million, as well as initiated a $0.10 quarterly dividend.

In terms of guidance, the company provided its 1Q 2026E outlook (see Exhibit 1 on page 2), which at the mid-point calls for a ~22% increase in sales to $2.7 billion and adj. EPS of ~$1.54 (versus prior consensus of $2.545 billion and $1.40, respectively).  Gross margin is projected to be 41%-42% while operating expenses are expected to total $370-$380 million.  Interest expense is expected to be $50 million while the tax rate and diluted share count are projected to be 14%-16% and ~363 million, respectively.  (Anecdotally, management’s 1Q F2026E outlook incorporates all known or anticipated impacts from tariffs.) 

Our fair value estimate (FVE) increases to $77 per share based on a 12.5x multiple on F2026E adj. EPS of ~$6.10 (see Exhibit 3 on page 3).  Please see the Spin-Off Report dated February 5, 2025 and Updates from 2/13/2025 & 2/24/2025 for additional information.

REZI to Separate its ADI and P&S Businesses in a Tax-Free Spin-Off in 2H 2026     

On July 30, 2025, before the market open, Residio Technologies (NYSE: REZI), a global provider of smart home products & systems that was itself spun-off from Honeywell International Inc. (NASDAQ: HON) in October 2018, announced its intention to separate its ADI Global Distribution (ADI) business from its Products & Solutions (P&S) business in a tax-free transaction that is expected to be completed in 2H 2026, subject to customary conditions including final Board approval as well as the receipt of regulatory, tax and financing support.  (Shareholder consent is not required.)

The separation is purportedly designed to unlock shareholder value by improving operational performance as well as strategic flexibility by creating two more focused business models that offer investors distinct (and in management’s view compelling) investment profiles.  To that end, ADI is a global wholesale distributor of low-voltage products, such as security and audio-visual (AV) solutions, and P&S is a building products manufacturer focused on residential controls and sensing solutions.  In the trailing twelve months ended March 2025, the ADI segment posted net revenue of $4.5 billion and a segment adjusted EBITDA margin of 7.5% while the P&S segment generated net revenue of $2.6 billion and a segment adjusted EBITDA margin of 24.2%.

In terms of leadership, current chief executive officer (CEO), Jay Geldmacher, will retire, as previously announced, upon completion of the separation and Tom Surran, President of P&S, and Rob Aarnes, President of ADI, will continue leading the standalone Resideo and ADI businesses, respectively.

In terms of guidance, along with today’s announcement, REZI indicated that it expected to report 2Q 2025 results above the high-end of its previous outlook, which called for consolidated sales of $1.805-$1.855 billion with adjusted EBITDA and EPS of $175-$195 million and $0.51-$0.61, respectively. For the full-year 2025E, REZI’s most recent commentary targeted sales of $7.285-$7.485 billion along with adj. EBITDA and EPS of $725-$805 million and $2.23-$2.47, respectively (based on a diluted share count of ~150 million).  Full-year cash flow from operations is projected to be $345-$405 million, which after a capital spending budget of $140-$145 million, implies free cash flow (FCF) of $205-$260 million.  Separately, Residio also announced it has entered into a definitive agreement with former-parent Honeywell HON) to accelerate and eliminate all future monetary obligations under the Indemnification & Reimbursement Agreement that was arranged leading up the its spin off (again, in October 2018) by making a one-time cash payment of $1.59 billion to HON in 3Q 2025, which will eliminate REZI’s ~$140 million of annual payments to the former parent that were scheduled through the end 2043.

Based on a blended peer multiple of ~9.5x 2026E adj. EBITDA as well as projected net debt, including the anticipated payment to HON, yields a preliminary, sum-of-the-parts fair value estimate of ~$4.5 billion or ~$30 per share (based a diluted share count of ~150 million).