ADT: Security

04/15/2015 8:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Our latest spotlight recommendation is the leading player in a market with a long runway for future growth; the company claims a leading 25% share of the highly fragmented and lightly penetrated market for home security and automation, notes Richard Moroney, editor of Dow Theory Forecasts.

ADT (ADT) provides electronic-security services to 6.7 million homes. Its services detect intrusions, smoke, carbon monoxide, flooding, and medical emergencies.

Tyco International (TYC) acquired ADT in 1997, then spun it off in September 2012. Its five largest rivals combine for only 15% of the residential market, projected to grow 4% to 5% this year.

All but 8% of revenue is recurring, giving management high visibility regarding its stable, if unspectacular, growth.

Sales have risen in each of the past 13 quarters, including 6% in the December quarter, the strongest growth so far in ADT’s second act as a publicly traded company.

ADT could face more competition if Comcast (CMCSA) and AT&T (T) expand further into home security.

However, the market has plenty of space to accommodate several big players. Just 19% of US homes have security systems, compared to 75% with high-definition TV and 83% with internet.

About 71% of ADT’s new residential customers are signing up for Pulse, a remote monitoring and automation system launched in 2010. ADT Pulse taps into the smart-everything craze and provides additional services that increase average revenue per user.

ADT also controls the largest slice—13%—of the $2.4 billion small-business market, expected to grow 3% to 4% in 2015.

ADT may exceed that growth rate, considering the October expiration of a non-compete agreement with Tyco that now allows ADT to pursue larger business accounts.

ADT expects recurring revenue to rise 5% to 6% in fiscal 2015 ending September. The consensus estimate targets per-share-profit growth of 2% in the March quarter and 4% in fiscal 2015, targets that seem unduly low.

The company raised its dividend 5% in January. ADT also repurchased enough shares to reduce its stock count by 12% in 2014.

At 20 times trailing earnings, the stock trades slightly below its 30-month average. ADT trades at just 12 times free cash flow, a 64% discount to the median industrial stock. ADT is a Long-Term Buy.

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