On Aug 9, Zacks Investment Research upgraded security services
The ADT Corporation
) to a Zacks Rank #1 (Strong Buy) from a Zacks Rank #2 (Buy)
largely on the back of strong third-quarter fiscal 2014 results and
healthy long-term fundamentals.
ADT's share price has steadily been on an uptrend since May 2014.
Despite its strong price appreciation, ADT still has the
wherewithal for the stock to climb up. The stock is currently
trading at a forward P/E of 18.0x and has long-term earnings growth
expectation of 8.9%.
Why the Upgrade?
ADT reported adjusted earnings of 55 cents per share versus 53
cents per share in the year-ago quarter and comfortably beat the
Zacks Consensus Estimate by 9 cents. Total revenue increased 1.9%
year over year to $849 million, while recurring revenues (which
accounted for 92.5% of total revenue) were up 2.7% to $785 million.
Recurring revenue growth was largely driven by an increase in
average revenue per customer, which was up 3.9% year over year to
ADT undertook several key initiatives to accelerate growth, improve
cost efficiencies, and optimize capital structure. In order to
capture a greater pie in the market, the company invested heavily
in its ADT Pulse platform and launched several new products. ADT
Pulse take rates climbed to 49% of customer additions, up from 28%
in the year-earlier quarter.
During the quarter, ADT reduced customer attrition by initiating
tighter credit screening policies, implementing resale efforts and
customer loyalty programs. Revenue attrition improved 30 basis
points to 13.9% on a sequential basis, while unit attrition in
residential and small business channels was up 20 basis points
sequentially to 13.5% due to relocations associated with the
housing recovery and non-pay customers.
In order to reduce subscriber acquisition costs, ADT implemented
new technology and installation procedures and optimized lead
management, sales conversion and marketing activities across all
channels. The company also collaborated with location-based
services and family networking technology provider Life360 to add a
new dimension to its expanding portfolio.
Subsequent to the quarter end, ADT closed the acquisition of
Reliance Protectron, Inc. - one of the largest security monitoring
and installation companies in Canada. With the deal, ADT has
strengthened its Canadian presence to better serve over 800,000
local customers with the best of products and solutions along with
superior customer service in the security industry. In addition,
the strategic buy will offer a steady revenue stream to ADT as
Protectron reportedly has higher levels of customer retention than
other major players in North America.
All these offer an enticing growth potential for ADT. The solid
fundamentals also find confirmation in positive estimate changes,
driving the Zacks Consensus Estimate higher both for the current
quarter as well as for the fiscal. The Zacks Consensus Estimate for
the ongoing quarter and fiscal are currently pegged at 50 cents and
$1.97, respectively, representing 7.8% and 7.0% year-over-year
Other Stocks to Consider
Other stocks to watch out for in the industry include CBIZ, Inc. (
), The Hackett Group, Inc. (
) and Huron Consulting Group Inc. (
), each carrying a Zacks Rank #2 (Buy).
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