We suggest investors stay invested in security and protection
The ADT Corporation
) based on a relatively balanced view. The stock at present
neither calls for a bullish take nor a hurried sell-off. A brief
discussion of the underlying factors would further explain our
With a wide array of products catering to a broad spectrum of
customer needs, ADT has a strong footprint in the large and
growing residential and small business security market. The
company's product portfolio 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 are still under-penetrated in North American
households. In addition, rising concerns about crime and security
issues (particularly for the 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.
The company envisions significant growth potential and is all set
to capitalize on this opportunity by leveraging its efficient
operating model and cutting technology costs over time. These
efforts would enable the company to considerably reduce the cost
of basic installation and services, thereby making it affordable
for more and more households and businesses. As it looks now, we
find the inherent growth prospects of ADT very encouraging.
In fact, a bulk of monitoring and home/business automation
services and a large portion of maintenance services are governed
by multi-year contracts with automatic renewal provisions, which
generate significant recurring revenues for ADT. This insulates
the company from market volatility and enables it to invest in
healthy organic and inorganic growth. Mergers and acquisitions
have also played a pivotal role in ADT's growth story over the
years. Periodic investments in the direct sales force and
complementary distribution channels should also enable ADT to
retain and capture additional market share to fuel its growth
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 stiff
competitive pricing pressure 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 value drivers to stave off
competition. This inevitably increases its operating costs and
reduces 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. 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 business.
ADT's first quarter fiscal 2014 results also failed to impress.
GAAP net income declined to $77 million or 39 cents per share
from $105 million or 44 cents per share in the year-ago quarter.
The year-over-year decrease in earnings was primarily
attributable to high operating costs and interest expense
stemming from its status as a standalone public company.
With a mix of both positive and negative factors, we currently
maintain our Neutral recommendation on the stock. ADT holds a
Zacks Rank #3 (Hold). Stocks in the industry that look promising
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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