Shares of leading security solutions provider Napco Security Technologies (NASDAQ: NSSC) have dropped roughly 18% over the last week as of 4 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence. Despite narrowly squeaking past analysts' expectations for its fourth-quarter earnings report last Friday, Napco Security was sent lower by the market.
While this reaction seems harsh, it is worth remembering that the market probably had Napco priced for perfection, with its stock already up 95% in just the last year.
Napco Security: Justifiably priced for perfection
Napco Security's platform spans the "full security spectrum," covering alarms and connectivity (intrusion, cellular, and fire alarm systems), locking (architectural, mechanical, and wireless locks), and access control (ID readers, control panels, and video). Napco is unique in the sense that it is the only company in its peer group that spans all three of these areas, meaning it can be a one-stop shop for customers or work alongside already installed products.
In addition to this complete suite of services, the company's core commercial, school, and residential end markets are expected to grow by 8%, 11%, and 12%, respectively, through 2026. As landline telephone services are phased out in favor of Napco's wireless security communications, the company should thrive as businesses replace old security systems.
This upgrade cycle to cellular-based and wireless communications is particularly critical to Napco as it generates precious recurring service revenue (RSR). Growing at double the rate of the company's overall sales, Napco's RSR now accounts for roughly 40% of total revenue. Generating 90% gross margins, this rising RSR should continue pushing the company's profitability higher.
Trading at 29 times forward earnings, Napco Security has a premium valuation but looks like a great "forever" holding thanks to its growing RSR and full suite of security offerings.
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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Napco Security Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
