Analyst: Steadily Improving ADT Stock Is a Bargain, Looks Promising
ADT’s stock is said to currently be a relative bargain thanks to a low attrition rate and continuing growth initiatives in commercial security.
Last December, ADT (NYSE: ADT) announced its plans to go public. The company planned to raise $2 billion by offering 111.1 million shares at a price range of $17 to $19.
The shares ended up opening at $12.65, hit a low of $12 and ultimately closed the day at $12.39, down 11.5% from the offering price. Pundits immediately began to question ADT’s IPO decision.
However, it’s not all bad news. Despite the lackluster price of its shares, ADT is doing just fine, and its stock looks like a relative bargain, according to Seeking Alpha’s Gary Alexander.
When you think of ADT, you probably think of a legacy hardware company that has probably already installed itself into every American home that wants one – in other words, there’s little room for growth. While the residential side of this argument is valid, we can’t forget that ADT is also making a successful push into commercial security. And for the business as a whole, it’s laser-focused on bringing down churn rates (something it’s been succeeding at in the past two quarters) and improving operating margins to bring down the massive debt load it incurred in its private equity buyout two years back.
Make no mistake: ADT certainly isn’t an exciting growth story, at least not anymore. It is, however, a narrative of slow and steady improvements – single-digit top line growth balanced against improving margins and double-digit cash flow growth. Over time, ADT will begin to polish itself as it cleans up its debt and manages to take up its net profit margins after not being crushed by weighty interest payments.
The company strengthened its commercial security footprint by acquiring Aronson Security Group this past March and Acme Security Systems just a few weeks later.
In a Q1 earnings call earlier this year, it revealed it had lowered its attrition rate to 13.6%, an improvement of 90 basis points year-over-year, marking a new all-time low.
Alexander says this is a major point to consider going forward.
While a 90 bps improvement might not sound like a huge achievement, recall that ADT’s CFO Jeff Likosar noted in last quarter’s (Q4) earnings call that each basis point of churn improvement translates to a $1 million reduction in annual costs, and thus a $1 million improvement in operating cash flows:
“As a reminder, every 100 basis points of attrition equates to an approximately $100 million reduction in the annual costs, would otherwise incur to replace lost revenue. So this is a key value driver for us.”
As such, the continued improvement in ADT’s attrition rates is a huge driver of the company’s earnings, and the continued declining trend is a large bullish signal for ADT. Especially as the company rolls out new, tech-forward features like ADT Go (which allow home monitoring from a mobile app), customer attrition should see further declines. This is consistent as well with ADT’s strategy to go after the highest-quality customers (lowest possible churn) and reduce customer acquisition costs.
You can read the rest of Alexander’s analysis here.
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