ADT Corp. ADT-NYSE
Wednesday’s close: $40.95 (U.S.)
52-week trading range: $34.38 to $50.22 a share
Annual dividend: 50 cents for a yield of 1.2 per cent
Analysts’ ratings: There were seven buys, four holds and no sells, according to Bloomberg data. Target prices ranged from $44 a share, as estimated by Barclays analyst Scott Davis, to $59 a share, by William Blair & Co. analyst Nicholas Heyman.
Recent history: Shares of the Boca Raton, Fla.-based home security company have gained 8.2 per cent (including dividends) over the past year. ADT shares have struggled recently, partly because of the market selloff and softer sales through its dealer sales channel. The company, which was spun out of Tyco International Ltd. last September, is the largest U.S. player with about 25 per cent of the home security market, and 14 per cent of the small business segment. The total market is about $13-billion. ADT has also embarked on a expansion beyond conventional services with its a product offering, which allows customers to control alarm settings remotely from devices like smartphones and tablets.
Manager insight: A U.S. housing recovery combined with a push to increase market share in a “fragmented” industry dominated by smaller, local players should help drive ADT shares higher, says Andy Nasr, a portfolio manager with Middlefield Capital Corp.
“There is very low household penetration for alarm-monitored security in the United States so that is going to be a key catalyst,” said Mr. Nasr, who bought ADT shares within the past three months. “Only 25 per cent of homes have security systems, of which 5 per cent are unmonitored ... It’s just an industry that has not matured yet. I also think there is an opportunity for them to make acquisitions.”
A sustained rebound in the U.S. housing market will boost demand for homes with monitored security systems, he suggested. “Home ownership is at the lowest level it has been since 1997 in the United States.”
ADT trades attractively at 5.5 times earnings before interest, taxes, depreciation and amortization (EBITDA), said Mr. Nasr. He has a 12- to 18-month target of $55 on the stock.
Investors should not be concerned by slower recent sales through the dealer channel (which uses different home security providers) because ADT’s business in dealing directly with customers “is far more important,” he said. The company became concerned with the aggressive marketing practices of some “lead generation” firms used by dealers so they had to drop them, he said. “That caused sales to decline...That is what has happened, but it is really transitory in nature.”
Because only about 60 per cent of ADT’s customers use an automatic payment system compared with nearly 90 per cent for privately held rival Vivint Inc., “there is an opportunity for them to migrate customers to auto-pay” and reduce attrition, he said.
Competition from cable and telecommunication companies entering the home security space is a risk to the story, he acknowledged. Unlike ADT, these players typically outsource the installation and services “so they are not going to be as competitive from a margin standpoint, although they can offset that with bundling their services,” he said.
While these rivals could ramp up their home security business, it’s still expensive to build the infrastructure that ADT has, so it would be almost cheaper to buy this company, he said. “That is potentially another catalyst for the stock...I think it will ultimately get taken out.”