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Why Investors Like What They See in Security

Publicly-traded security companies, and the industry as a whole, sustained positive performance throughout 2013. Drivers included higher than expected uptake in residential interactive systems, video surveillance’s ongoing sizzle, plus sizable gains in the acceptance of wireless electronic locks and…

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The stock market, as measured by the S&P 500, enjoyed its strongest performance in 2013 dating back to 1997. The broad market gauge gained nearly 30%. The Dow Jones Industrial Average (DJIA) had its best year since 1998, gaining 26.5% in 2013, hitting 52 all-time highs along the way. And the NASDAQ surged 38%, marking its best year since 2009.

Helping drive some of that encouraging performance were the manufacturers, systems integrators, alarm monitoring companies and related firms that comprise the wider security industry. In fact, according to Imperial Capital, 2013 marked the fifth year in a row that the companies listed in its Physical and ID Security Index have outperformed the S&P 500 and the DJIA by more than 100%.

Yet significant challenges and disruption is unfolding in market niches throughout the industry, promising wholesale change that will enrich some companies while causing others to whither.

During the first half of 2013 the sector experienced a decline in mergers and acquisitions (M&A) compared to the same period the previous year. Yet there were still several notable transactions that were consummated, and the table is set for increased deal-making in 2014.

Based on in-depth interviews with Imperial Capital Managing Director Jeff Kessler, one of the industry’s foremost experts, Security Sales & Integration’s annual industry financial analysis examines just some of the trends that impacted the performance of various security sectors in 2013.

Monitoring Firms, Dealers Embrace and Brace for Change

A chief disruptive factor facing publicly-traded monitoring companies as well as private firms is the expansion in marketing and profile of cablecos and telecoms into the security channel. This is connected home services. Of these additional new households, the investment bank is projecting the largest, best-run and best capitalized home monitoring security companies will garner between five million and six million of the total households added in the next several years. For alarm companies, it represents an annual subscriber growth of about 3% to 5%.

The stark caveat here is smaller and midsize independent dealers will be under tremendous pressure to compete. Many lack the necessary IP/IT skillsets or the financial ability to pay monthly fees to home services platform providers such as or iControl. Smaller dealers can still tout their local credibility in providing years of good service. Yet even a price point $5 below the much larger providers means little if their offering lacks a value proposition.

The hastening of smaller companies unable to compete will likely lead to many companies selling out of the business or selling to those who buy small businesses. This natural selection of sorts in the marketplace was originally projected by Imperial Capital to transpire over the next five to eight years, but that timeframe might now be compressed due to Google’s acquisition of Nest Labs. The expectation is for increased acquisitions by other device companies.

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About the Author
Rodney Bosch
Although Bosch’s name is quite familiar to those in the security industry, his previous experience has been in daily newspaper journalism. Prior to joining SECURITY SALES & INTEGRATION in 2006, he spent 15 years with the Los Angeles Times, where he performed a wide assortment of editorial responsibilities, including feature and metro department assignments as well as content producing for Bosch is a graduate of California State University, Fresno with a degree in Mass Communication & Journalism. In 2007, he successfully completed the National Burglar and Fire Alarm Association’s National Training School coursework to become a Certified Level I Alarm Technician.
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