Home and small-business security company ADT (UNKNOWN:ADT.DL) debuted on the markets in October of last year as a spinoff of conglomerate Tyco. While spinoffs are often misunderstood or neglected investment opportunities, this one came out priced high and covered well, eliminating the opportunity for a value play. Since its IPO, the stock has only ticked up around 6% while sales and profits continue to rise. In the past quarter, the company added more than 300,000 new customers, with plenty of room to grow. It's no doubt that ADT is an industry leader, but is the stock still too expensive to warrant a buy?
ADT brought in $821 million for the first quarter -- a hair under 2% growth over last year's number. As mentioned by management, overall sales growth has been limited since the company decided to switch over to completely ADT-owned systems. This helps the company protect its intellectual property, which is more important for long-term product sustainability than short-term revenue growth.
EBITDA grew nearly in line (up 1.5%) to $409 million, yielding an EBITDA margin of nearly 50% -- flat with the prior year. On the bottom line, EPS came in at $0.41 per share -- $0.01 below Wall Street analysts' expectations.
ADT represents 25% of the home automated security market, meaning there is room for growth but its typical box-near-the-front-door product is nearing maturity. The current growth driver for the company lies in two areas: small business and the Pulse product. Let's take a look at the latter.
Pulse was introduced more than two years ago, but it is just now starting to see some really encouraging results. The company originally guided that 20% to 30% of new direct-sale customers would opt for the Pulse option. In the fourth quarter of 2012, the penetration rate was just under 30%. For the just-ended quarter, the take rate has risen to 32.7%. Compared to the year-ago quarter, take is up 14%. The Pulse system lets owners interact with their homes and security systems via phones and tablets. Owners can control anything from lights to arming the system. In total, Pulse units represented 23% of all new subscribers, and that does account for the 13,000 customers who were upgraded from existing systems throughout the quarter.
The company continues to grow and has industry-leading products, but is it enough to warrant valuation?
ADT is relatively unique in the public market in that it does not have a direct competitor. Companies such as Protection One and Bosch Security are privately held entities, which makes comparing valuation difficult. At more than 21 times forward earnings, though, ADT appears expensive regardless. On a trailing basis, the company's enterprise value trades at nearly nine times EBITDA.
There are some public companies that are moving into the home automation/security industry, such as media juggernaut Comcast. The latter is rolling out products that easily complement its cable provider business, and conversion rates are appealing. Time Warner Cable is doing something very similar as well.
With a limited moat and the threat of the better-scaled cable operators, there is a fair amount of risk in ADT, especially at today's prices. All in all, investors are wise to wait for a drop in price for a better entry point into this well-managed, strong-performing company.
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