The Best and Worst Performing Security Stocks of 2017

SSI’s annual summary takes a look at the strong performance of publicly-traded electronic security companies in 2017. The solid run follows a comparable ascending market sector posted the previous year.

The Best and Worst Performing Security Stocks of 2017

By all accounts, 2017 was a banner year for broader stock market indices. The Dow Jones Industrial Average (DJIA) climbed 25.1% during the course of the year as it came within 281 points of the 25,000 mile-stone. (The DJIA would eclipse the 25K mark Jan. 4 amid strong economic reports and growing optimism about the new tax law.)

Broader indices mimicked this performance with the S&P 500 up 19.4% and the tech-heavy Nasdaq up almost 28.2% for the year. The stellar stock market performance was supported by several factors, including:

  • Strong growth in the U.S. gross domestic product, including 3.2% annualized rate in the 2017 fourth quarter
  • Low unemployment rate falling to 4.1% as of December 2017
  • Strong business and consumer confidence levels
  • Increasing housing starts
  • Investor optimism about tax reform

Stocks within the physical and cybersecurity sectors also performed well during 2017 with a representative index of 47 publicly-traded security stocks registering a gain of 23.6% for the year.

While economic growth was strong in 2017, a phenomenon consistent in both the broader markets and stocks in the security sector was the expansion of underlying valuation multiples.

For example, the aggregate multiple for the DJIA expanded from approximately 12x earnings before interest, taxes, depreciation and amortization (EBITDA) to 13.3x EBITDA during 2017.

The broader S&P 500 began at just under 12x EBITDA and finished at approximately 13x EBIT-DA. And the Nasdaq increased from 14x EBITDA at the beginning of the year to 16.5x EBITDA at the end of the year.

Reflecting the positive growth outlook and increasingly pervasive presence of technology in security, valuations for the security index most closely tracked the Nasdaq composite.

The aggregate enterprise value/EBITDA (EV/EBITDA) multiple increased from 14.5x EBITDA at the beginning of the year to approximately 16.5x EBITDA at the end of the year.

SSI’s annual industry financial analysis examines just some of the trends that impacted the performance of various security sectors in 2017. We’ll also review a group of public consumer electronics companies, plus related security stocks, which increased a whopping 40.5% over the previous year.

Strong Fundamentals Underpin Industry

According to market research firm Memoori, underlying fundamentals in the physical security industry continue to be strong. In 2017, the production value of physical security products for the access control, video surveillance and intrusion alarms/perimeter protection markets collectively increased by 4.5% reaching $29.2 billion.

The largest of these sectors, video surveillance, grew by 5.9% to $15.9 billion. The second largest, access control, grew more rapidly at 6.6% to reach $6.8 billion. The more mature intrusion alarms/perimeter protection market grew by 2.5% to $6.4 billion.

Within the traditional physical security industry, Cloud-based access control (access control as a service or ACaaS) and video surveillance (video surveillance as a service or VSaaS) are expected to outpace industry growth rates.

In 2016, the ACaaS market totaled approximately $400 million, VSaaS around $600 million. By 2022, the ACaaS market is projected to increase to $900 million with VSaaS topping $1 billion by 2020 (14% compound annual growth rate [CAGR]), according to Memoori.

The cybersecurity industry will also grow quickly in the years ahead with a projected 11% CAGR through 2022, according to MarketsandMarkets. Key factors driving this growth include security requirements for the Internet of Things (IoT), bring your own device (BYOD) and increased deployment of web and Cloud-based business applications.

Stock Performance Winners & Losers

Here is a sampling of some of the best and worst performing stocks in the security arena during 2017.

Strongest Security Stock Performers

Alarm.com (Nasdaq: ALRM)

  • 35.6% stock price gain, reaching a high of $49.49 before settling back to close the year at $37.75
  • EV/EBITDA multiple remained virtually unchanged moving from 25.7x to 25.6x (EV/revenue multiple increased from 4.4x to 5.3x)
  • Estimated revenues grew by 27.8% to $334 million and EBIT-DA increased by 53.9% to $69 million. Note that because of the rapid improvement in EBIT-DA, the company’s EV/EBITDA multiple remained virtually unchanged.

Allegion (NYSE: ALLE)

  • 24.3% stock price increase
  • EV/EBITDA multiple remained virtually unchanged moving from 15.5x to 15.4x
  • Revenues increased by an estimated 6.8% to $2.39 billion as EBITDA increased by 18% to $565 million Avigilon (TSE: AVO)
  • 76.2% stock price increase, $9.54 to $16.82
  • EV/EBITDA multiple decrease from 13.2x to 10.9x
  • For 2017, the company estimates revenue growth of 15.1% and EBITDA growth of 100% to $74 million. Due to the improvement in EBITDA, the company’s EV/EBIT-DA multiple declined from 13.2x to 10.9x during 2017.

Brinks (NYSE: BCO)

  • 90.8% stock price increase, $41.25 to $78.70
  • EV/EBITDA multiple increase from 8.5x to 10.6x
  • Brinks revenue from security services, such as transportation and cash management, increased by 8.1% to an estimated $3.2 billion while EBITDA jumped by 51.4% to $425 million.

Control4 (Nasdaq: CTRL)

  • 191.8% stock price increase, $10.20 to $29.76
  • EV/EBITDA multiple increase from 12.1x to 19.1x
  • Estimated revenue for the year grew by 16.7% over 2016 to $244 million

Fortinet (Nasdaq: FTNT)

  • 45.1% stock price increase
  • EV/EBITDA multiple decline from 43.7x to 20.5x (EV/revenue multiple increase from 3.3x to 4.3x)
  • In 2017, the company increased revenues by nearly 17% to $1.5 billion while increasing EBITDA from $96 million to $308 million. Note that because of the rapid improvement in EBITDA, the company’s EV/EBITDA multiple declined during 2017.

Hikvision (SHE: 002415)

  • 162.2% stock price increase, $2.29 to $5.99
  • EV/EBITDA multiple increase from 20.1x to 34.7x
  • The company posted estimated revenue growth for the year of approximately 38.8% to $6.4 billion, and EBITDA jumped by 59.2% to $1.56 billion

Honeywell (NYSE: HON)

  • 32.4% stock price increase, $115.85 to $153.36
  • EV/EBITDA multiple increase from 12.4x to 14.6x
  • Revenues increased by 3.1% to $40.5 billion and EBITDA increased by 9.2.% to $8.4 billion or 20.8% of sales

Kratos Defense & Security Solutions (Nasdaq: KTOS)

  • 43.1% stock price increase
  • EV/EBITDA multiple decreased from 59.2x to 22.7x
  • In 2017, estimated revenues grew by 11.4% to $745 million and EBIT-DA increased from $16 million to $54 million.

Varonis Systems (Nasdaq: VRNS)

  • 81.2% stock price increase, $26.80 to $48.55
  • EV/revenue multiple increase from 3.7x to 5.8x (note that EBITDA was negative in 2016)
  • In 2017, revenue grew by an estimated 28% to $210 million.

Keep reading for 2017’s underperforming stocks and a recap of M&A activity…

Security Is Our Business, Too

For professionals who recommend, buy and install all types of electronic security equipment, a free subscription to Security Sales & Integration is like having a consultant on call. You’ll find an ideal balance of technology and business coverage, with installation tips and techniques for products and updates on how to add sales to your bottom line.

A free subscription to the #1 resource for the residential and commercial security industry will prove to be invaluable. Subscribe today!

Subscribe Today!

Leave a Reply

Your email address will not be published. Required fields are marked *

Get Our Newsletters