In this article, let's take a look at The ADT Corporation (ADT, Financial), a $6.45 billion market cap company, which is believed to be the largest provider of electronic security, interactive home automation and related monitoringservices in its two geographic markets of the U.S. and Canada.
New markets
The company´s market share in 2013 was approximately 25%. Compared to Vivint and Monitronics, it is six times. The company has (at least) three-year contracts that ensure the business model. However, this model is under serious doubt because large telecom and cable providers have entered the market with comparable offerings and at very attractive prices.
This will continue to be a major risk and ADT will have to choose between a strategy of lowering prices or being more promotional to attract new customers. Looking at strategies on new markets, the company should invest in growth platforms, with focus on market for small businesses and penetration of residential markets.
With respect to strategies in markets already penetrated, we can highlight the expansion of existing channels, improving sales force effectiveness and strengthening its strategic marketing.
“Pulse Revolution”
With ADT Pulse customers can lock and unlock their doors, arm and disarm their security system, control their appliances and lighting and adjust their thermostat or view real-time video from cameras covering different areas –Â all from their smartphones. Depending on their service plans, practically all can remotely monitor and manage their homes and small business environments.
ADT continues to add new features and capabilities to its Pulse platform to ensure that the product continues to be the best home security and automation solution.
Cash dividends
Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividend and share repurchases. Dividend-payment history affirms its commitment to maximize shareholder wealth. The company raised its quarterly dividend to $0.2 per share from $0.125.
Dividends have been paid since 2012 and the current yield is 2% which is considered a bit low to protect investor´s purchasing power.
Revenues, margins and profitability
Looking at profitability, revenue growth by 1.92% but earnings per share decreased in the most recent quarter compared to the samequarter a year ago ($0.47 vs $0.52). During the past fiscal year, ADT increased its bottom line by earning $1.88 versus $0.40 in the prior year. This year, the market expects an improvement in earnings ($1.96 versus $1.88).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| ADT | ADT | 9.74 |
| ECOL | US Ecology Inc. | 13.89 |
| ACU | ACME United Corp. | 11.44 |
| AXR | AMREP Corp. | -3.71 |
| TYC | Tyco International Ltd. | 10.51 |
| Ă‚ | Industry Median | 9.45 |
The company has a current ROE of 9.74% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, US Ecology Inc. (ECOL, Financial) nearly reaches this level. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 22.4x, trading at a premium compared to an average of 20.3x for the industry. To use another metric, its price-to-book ratio of 2.05x indicates a premium versus the industry average of 1.94x while the price-to-sales ratio of 2.1x is above the industry average of 1. 37x. All these metrics indicate that the stock is relatively overvalued.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
As outlined in the article, ADT's top businesses, which include its pulse creation, and the possibility to enter into new markets; are important key drivers of the company.
According to Yahoo! Finance, the estimated one-year target share price is $43.67; if you buy shares at current market price ($37.06), your return from price appreciation would be 17.8%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 20 cents per share each quarter, totalizing $0.8 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on investment for a stock, and in this case is 2%. So the total return for investing in ADT is 19.8%.
Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
