Stock Spotlight

ADT looks like a safe pick

Recent Price
$40
Dividend
$0.84
Yield
2.1%
P/E Ratio
19
Shares (millions)
175
Long-Term Debt as % of Capital
63%
52-Week Price Range
$42.88 - $28.85

ADT ($40; ADT) is the leading player in a market with a long runway for future growth. The company provides electronic-security services to 6.7 million homes (about 90% of recurring monthly revenue) and small businesses (9%) in the U.S. and Canada. Its security and automation services detect intrusions, smoke, carbon monoxide, flooding, and medical emergencies. Tyco International ($43; TYC) acquired ADT in 1997, then spun it off in September 2012.

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, yielding 1.9%, is a Buy and a Long-Term Buy.

Business breakdown

ADT claims a leading 25% share of the highly fragmented and lightly penetrated market for home security and automation. Its five largest rivals combine for only 15% of the residential market, projected to grow 4% to 5% this year. ADT could face more competition if Comcast ($59; CMCSa)and AT&T ($33; T) expand further into home security. However, the market has plenty of space to accommodate several big players. Just 19% of U.S. 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.

The housing market shows signs of heating up. In February, an index of pending sales for previously owned U.S. homes rose to its highest level since June 2013. New-home sales jumped 8% in February to reach their highest level since 2008. Strong home sales didn't always help ADT in the past, because the company struggled to retain customers who moved. But ADT Pulse has deepened customer relationships and reduced attrition caused by relocation.

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 noncompete agreement with Tyco that now allows ADT to pursue larger business accounts.

Conclusion

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.

An annual report for The ADT Corp. is available at 1501 Yamato Road, Boca Raton, FL 33431; (561) 988-3600; www.adt.com.


 

ADT

 
Quarter
Per-Share Earnings
Sales Change
Quarterly Price Range
P/E Ratio Range
Dec '14
$0.51
vs.
$0.43
6%
$37.79
-
$30.45
19 - 15
Sep '14
0.55
vs.
0.46
4%
37.50
-
32.74
19 - 17
Jun '14
0.55
vs.
0.53
2%
35.19
-
28.85
18 - 15
Mar '14
0.49
vs.
0.41
2%
40.60
-
27.93
22 - 15

 
Year (Sep.)
Sales (Bil.)
Per-Share Earnings*
Per-Share Dividend
52-Week Price Range
P/E Ratio Range
2014
$3.41
$2.02
$0.80
$46.05
-
27.93
23 - 14
2013
3.31
1.84
0.50
50.37
-
35.38
27 - 19
2012
3.23
1.74
0.13
41.00
-
34.68
24 - 20
2011
3.11
1.66
NM
NM
-
NM
NM

 
Quadrix Scores†
Overall
Momentum
Value
Quality
Financial Strength
Earnings Estimates
Performance
90
78
79
58
69
49
93

* Earnings exclude special items.
NM Not Meaningful - stock wasn't publicly traded until late 2012.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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