On Jan 8, we initiated our coverage on
The ADT Corporation
) with a Neutral recommendation. The sideline stance is based on
its balanced business model with a diversified product portfolio
and customer base, while the stock remains vulnerable to gross
margin pressures and stringent government laws and regulations.
Why Neutral Recommendation?
With a wide array of products to cater to a broad spectrum of
customer needs, ADT has a strong footprint in the large and
growing residential and small business security market. The
product portfolio of the company includes some of the most
respected, trusted and well-known brands in the industry. As
reputation and reliability serve as the two key elements in the
decision-making process while purchasing home and small business
security and automation services, ADT has a distinct advantage
over rivals with its well-recognized and reliable brands. The
depth in product portfolio, strong brand identity and a
well-diversified customer base offer an unrivalled competitive
advantage to ADT.
The company believes monitored security and home/business
automation services remain under-penetrated in North American
households. In addition, rising concerns about crime and security
issues (especially by an aging population), increasing customer
interest in lifestyle and business productivity, and technology
advancements are likely to support the higher penetration of
interactive services and home/business automation. As such, the
company envisions significant growth potential and intends to
capitalize on this opportunity by leveraging on its efficient
operating model and lower technology costs over time. These would
then enable the company to considerably reduce the cost of basic
installation and services, thereby making it affordable for a
wider market acceptance by a larger portion of households and
businesses. We remain encouraged with such inherent growth
prospects of the company.
A bulk of the monitoring and home/business automation services
and a large portion of the maintenance services are governed by
multi-year contracts with automatic renewal provisions, which
generate significant recurring revenues for ADT. This insulates
the company from the volatility in the market and enables it to
invest for a healthy organic and inorganic growth. Mergers and
acquisitions continue to play a pivotal role in ADT's growth over
the years. Periodic investments for improvement of the direct
sales force and complementary distribution channels should also
enable ADT to retain and capture additional market share to fuel
its growth engine.
Reasons for Concern
On the flip side, ADT faces significant pricing pressure and
competition as the security alarm industry is highly fragmented
due to low barriers to entry. The company witnesses significant
competitive pricing pressures on installation, monitoring and
service fees. In addition, cable and telecommunications companies
are also eroding its market share by expanding into the monitored
security alarm industry and bundling their existing offerings
with monitored security services. As such, ADT has to continually
invest in R&D and similar other value drivers that act as a
hedge against tough competition. This increases its operating
costs and reduces its profitability to some extent.
In addition, the operations of the company are subject to various
federal, state, provincial and local laws and regulations in the
U.S. and Canada in areas such as consumer protection,
occupational licensing, environmental protection, labor and
employment, tax and other laws and regulations. In addition, most
states and provinces in which ADT operates have licensing laws
directed specifically toward the security services industry.
Increased government regulation escalates costs and restricts
operations, somewhat impairing the long-term growth of its
Other Stocks That Warrant a Look
ADT currently carries a Zacks Rank #2 (Buy). Other stocks that
are worth a look in the industry include
Nielsen Holdings N.V.
Verisk Analytics, Inc.
McGraw Hill Financial, Inc.
), each carrying a Zacks Rank #2 (Buy).
ADT CORP (ADT): Free Stock Analysis Report
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