ADT Inc (ADT, Financial), a prominent provider of security solutions in the United States and Canada, recently reported a daily gain of 3.05% and a 3-month gain of 1.92%. Despite a Loss Per Share of 0.05, the stock appears to be modestly undervalued. This article aims to dissect ADT's financials and intrinsic value to answer the crucial question: Is ADT truly undervalued? Let's delve into a comprehensive valuation analysis to uncover the truth.
Company Overview
ADT Inc is a renowned provider of monitored security, interactive home, and business automation, and related monitoring services in the United States and Canada. The company offers a comprehensive set of solutions, including burglary, video, access control, fire and smoke alarm, and medical alert solutions to residential, commercial, and multi-site customers. Its segments include Consumer and Small Business (CSB), Commercial, and Solar, with the Commercial segment contributing the maximum revenue.
With a stock price of $6.41 per share and a market cap of $5.90 billion, ADT's current valuation stands below the GF Value of $8.1, indicating a potential undervaluation.
Understanding GF Value
The GF Value represents the intrinsic value of a stock, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides a snapshot of the ideal fair trading value of the stock.
According to our analysis, ADT (ADT, Financial) appears to be modestly undervalued. The stock's GF Value, our estimation of its fair trading value, is based on historical multiples and future business performance estimates. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. Considering ADT's current price of $6.41 per share and a market cap of $5.90 billion, the stock seems modestly undervalued.
Given this undervaluation, the long-term return of ADT's stock is likely to be higher than its business growth.
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Financial Strength
Assessing the financial strength of a company is crucial before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. A glance at ADT's cash-to-debt ratio and interest coverage can provide valuable insights into its financial strength. Unfortunately, ADT's cash-to-debt ratio of 0.02 is worse than 95.67% of 1039 companies in the Business Services industry. This indicates that ADT's financial strength is poor.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. Companies with high profit margins are typically safer investments than those with low profit margins. ADT has been profitable 2 times over the past 10 years. Over the past twelve months, the company had a revenue of $6.50 billion and a Loss Per Share of $0.05. Its operating margin is 15.86%, which ranks better than 79.09% of 1052 companies in the Business Services industry. However, overall, ADT's profitability is poor.
Growth is a crucial factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. Unfortunately, ADT's growth ranks worse than 81.3% of 845 companies in the Business Services industry. Its 3-year average annual revenue growth is -1.3%, and the 3-year average EBITDA growth rate is -7.5%.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) and the weighted cost of capital (WACC) can provide valuable insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the ROIC should be higher than the WACC. For ADT, the ROIC is 1.11, and the WACC is 5.6, indicating an unfavorable comparison.
Conclusion
In conclusion, ADT (ADT, Financial) appears to be modestly undervalued. However, the company's financial condition is poor, and its profitability is subpar. Its growth ranks worse than 81.3% of 845 companies in the Business Services industry. To learn more about ADT stock, check out its 30-Year Financials here.
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