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Why ADT Inc Stock Just Popped 10%

By Rich Smith – Apr 5, 2018 at 2:48PM

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Morgan Stanley calls the value argument "very compelling."

What happened

Shares of home alarm specialist ADT Inc (ADT -2.08%) popped more than 10% in early trading Thursday, and remain up 9.2% as of 2 p.m. EDT, after receiving positive mention from analysts at investment bank Morgan Stanley this morning.

So what

Morgan Stanley was already optimistic about ADT shares, having rated the recent IPO -- which Morgan Stanley underwrote -- "outperform." Yesterday, the banker quality-checked that assumption in a meeting with management at ADT, and today published a note on its findings.

According to Morgan Stanley's report, reviewed by TheFly.com this morning, "ADT's service offering is differentiated from the product offerings of newer entrants." What's more, this differentiation is helping ADT to produce "steady operating growth" and "accelerating cash flow," says TheFly.

On top of all that, the analyst finds ADT to offer investors a "very compelling valuation."

Home alarm keypad and cellphone showing unlock icon

Morgan Stanley thinks you can unlock some value in ADT stock. Image source: Getty Images.

Now what

How "compelling" is the valuation? Currently priced at just $8.54 per share, Morgan Stanley says it thinks ADT stock could fetch as much as $15 a share within a year -- about a 75% return for new investors.

But is that realistic? I mean, sure, there was a time when Morgan Stanley hoped ADT would sell for even more than $15 a share at its IPO. And today, the stock doesn't look too unfairly priced at about 17 times earnings, with a 15% projected growth rate.

Still, there's a big difference between arguing that 17 times earnings is a fair price to pay for ADT -- and arguing it's "compellingly" cheap. Absent proof the stock can grow earnings a whole lot faster than most folks on Wall Street believe it can, I'm more inclined to call the stock fairly priced than cheap.

Rich Smith owns shares of ADT Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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