+ Watch ADT
on My Watchlist
Unedited excerpt from a CapsCall article tentatively scheduled to be published on 21-JUL-2014:Security giant ADT (NYSE: ADT) may be relatively new as a public company, but it traces its roots to 1874. ADT only became independently public in 2012 when it spun off from Tyco (NYSE: TYC) as that conglomerate broke itself apart to unlock value from its parts.While the Tyco break up showcases just how hard it can be to maximize value in a conglomerate structure, it did open up ADT as an attractive business to own. What makes ADT so attractive is its sticky subscription model. Its customers buy a system and then pay ADT a recurring monthly subscription fee for monitoring. The upfront cost of the security system keeps people from switching, enabling high margins in its monitoring business.
The yard-sign security company. Terrible quarter. Huge gap down open. Management's enormous stock buy-back a disaster. CEO says LONG TERM things may improve. Ugh.
Throwing off a crazy amount of free cash flow each quarter. Over the last 5 quarters, it has averaged ~$700MM in operating cash less cap ex spending. Their debt seems to pale in comparison to their free cash flow generation. I also like the small dividend. I am paying a little more for their earnings than I care to at this price, but I think their free cash flow more than makes up for this difference. Target $50 or possibly a little higher.
Prime for disruption. My next system will be a Scout. Ask the average owner if they like the contract and monthly monitoring price - they hate both.
good entry point after yesterday's sell-off
just a change to debt / ebitda ratio should drive the stock into the mid 60's.... but with growth we can see the high 70-low 80 range.
10 million shares are set to be repurchased next month. Theoretically this raises the price about $2 per share. That's nice, but it's also just the start. Even without share repurchases, there's a lot to like both short and long turn. Revenues are pretty consistent historically, and ADT dominates its market. They're aggressive with acquisitions, so they maintain growth. I don't put much weight on it, but you could probably make a tenable argument that stricter gun control laws would spur home security purchases (that's more in the realm of speculation, and plays no factor in my personal valuation). Oh and ADT pays a ~1% dividend if you like that kinda thing.
Most people are getting poorer and if social programs are cut as expected, home security needs will increase.
I think this is a good recession-proof stock. Only 1/5 of Americans have a home monitoring system, so there is plenty of room for growth. The technology that ADT is developing, such as accessing your home's features from your phone or tablet, looks great as well.
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