Long-established in the Business Services industry, ADT Inc (ADT, Financial) has enjoyed a stellar reputation. It has recently witnessed a surge of 5.27%, juxtaposed with a three-month change of -0.62%. However, fresh insights from the GuruFocus Score Rating hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of ADT Inc.
Understanding the GF Score
The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.
- Financial strength rank: 3/10
- Profitability rank: 4/10
- Growth rank: 4/10
- GF Value rank: 9/10
- Momentum rank: 4/10
Based on the above method, GuruFocus assigned ADT Inc the GF Score of 66 out of 100, which signals poor future outperformance potential.
ADT Inc: A Snapshot of the Business
ADT Inc is a provider of monitored security, interactive home and business automation, and related monitoring services in the United States and Canada. It offers residential, commercial, and multi-site customers a comprehensive set of burglary, video, access control, fire and smoke alarm, and medical alert solutions. The company segments include Consumer and Small Business (CSB), Commercial, and Solar. It generates maximum revenue from the Commercial segment. With a market cap of $5.7 billion and sales of $6.45 billion, the company has an operating margin of 15.86%.
Financial Strength Analysis
ADT Inc's financial strength indicators present some concerning insights about the company's balance sheet health. The company's interest coverage ratio of 2.36 positions it worse than 86.48% of 784 companies in the Business Services industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. It's worth noting that the esteemed investor Benjamin Graham typically favored companies with an interest coverage ratio of at least five.
The company's Altman Z-Score is just 0.28, which is below the distress zone of 1.81. This suggests that the company may face financial distress over the next few years. Additionally, the company's low cash-to-debt ratio at 0.02 indicates a struggle in handling existing debt levels.
The company's debt-to-equity ratio is 2.92, which is worse than 92.38% of 892 companies in the Business Services industry. A high debt-to-equity ratio suggests over-reliance on borrowing and vulnerability to market fluctuations. Additionally, the company's debt-to-Ebitda ratio is 5.32, which is above Joel Tillinghast's warning level of 4 and is worse than 81.15% of 785 companies in the Business Services industry. Tillinghast said in his book “Big Money Think's Small: Biases, Blind Spots, and Smarter Investing” that a high debt-to-Ebitda ratio can be a red flag unless tangible assets cover the debt.
Profitability Analysis
ADT Inc's low Profitability rank can also raise warning signals. Additionally, ADT Inc's Gross Margin has also declined over the past five years, as evidenced by the data: 2018: 77.27; 2019: 72.88; 2020: 71.47; 2021: 70.79; 2022: 68.10. This trend underscores the company's struggles to convert its revenue into profits.
Growth Prospects
A lack of significant growth is another area where ADT Inc seems to falter, as evidenced by the company's low Growth rank. The company's revenue has declined by -1.3 per year over the past three years, which underperforms worse than 65.92% of 983 companies in the Business Services industry. Stagnating revenues may pose concerns in a fast-evolving market.
Over the past five years, ADT Inc has witnessed a decline in its earnings before interest, taxes, depreciation, and amortization (EBITDA). The three-year growth rate is recorded at -7.5, while the five-year growth rate is at -5.3. These figures underscore potential challenges in the company's profitability.
Conclusion
Given the company's financial strength, profitability, and growth metrics, the GuruFocus Score Rating highlights the firm's unparalleled position for potential underperformance. While ADT Inc has a strong reputation in the Business Services industry, its current financial indicators suggest that it may struggle to maintain its historical performance. Therefore, investors should exercise caution when considering this stock.
GuruFocus Premium members can find more companies with strong GF Scores using the following screener link: GF Score Screen
