While no longer the undisputed dominate company in the industry it once was, ADT Inc. (ADT, Financial) does offer security, fire protection, smart home solutions and other related alarm monitoring services in 35 countries. With roughly 25% of the market for residential and 13% for small business in the United States, it is not going anywhere. And now with a partnership with Alphabet Inc.'s (GOOG, Financial) Google worth around $600 million and a $1.2 billion investment from State Farm, the company has fortified its future and can figure out how to further build shareholder value from here.
ADT has a storybook history
ADT is the largest security company in the U.S. with over 6 million customers and 22,000 employees. The company's products and services have been innovative and are designed to protect homes and businesses from a variety of threats, including burglary, fire and vandalism. Its monitoring services are staffed by 24/7 customer service representatives who are trained to respond to alarms quickly and effectively.
Founded in 1874 as the American District Telegraph Company by Edward A. Calahan, the company initially focused on providing telegraph services, but it soon expanded into the security industry. In 1901, ADT was acquired by Western Union (WU, Financial). AT&T (T, Financial) then bought Western Union in 1909. In 1910, ADT introduced the first commercial burglar alarm system. By 1930, the company had introduced the first residential burglar alarm system.
In 1964, ADT was found to be a monopoly in restraint of trade, providing almost 80% of the security business in the U.S. As a result, it was forced to divest of some of its assets and to adopt a uniform national price list and service offerings. A few years later in 1969, the company went public.
By 1994, the company had surpassed 1 million customers and in 1996, it was acquired by Tyco International (TYC, Financial), going public again in 2012. In 2016, the public company ADT was acquired by Apollo Global Management (APO, Financial) for $6.9 billion in a leveraged buyout, who finally flipped it back to the public markets in 2018.
Security remains a necessary part of life
ADT is an essential service that helps individuals, families and businesses protect their properties and assets. The company's residential and commercial security products deter burglaries, break-ins and other forms of unauthorized access through 24/7 monitoring. This peace of mind is invaluable for its customers, and the cost of its services are relatively low.
Professional monitoring plans for traditional ADT home security systems range from $45.99 per month to $59.99 per month. DIY home security systems range from $219.99 for the Starter System to $419.99 for the Premium System, and you can add professional monitoring starting at $19.99 per month.
The company claims that alarms reach 911 centers eight times faster than traditional voice handling speeds for participating centers connected to ADT’s SMART monitoring. Plus, as the industry leader, the company offers the longest money-back guarantee at six months.
That said, ADT's market share has been declining in recent years due to the rise of DIY security companies. These companies offer a lower-cost alternative to traditional security companies. Smart home technology is also allowing customers to control their security systems from their smartphones or other devices. This makes it easier for customers to arm and disarm their security systems, and it also allows them to receive alerts if there is any activity at their home or business. This is likely one reason why ADT partnered with Google's Nest.
With the population of the U.S. aging and older adults more likely to purchase security systems than younger adults, ADT has a long life ahead of it.
New partnerships, new investors
In recent years, ADT has announced two critical partnerships: Google and State Farm.
In 2020, ADT announced a partnership with Alphabet's Google to develop new smart home security products and services. The partnership was a strategic move for both companies as ADT was looking to expand its reach into the growing smart home market, while Google was looking to enter the security market. Google initially put up $450 million for a 6.6% stake. The partnership has resulted in a number of new products and services, including ADT+ and a DIY option.
Last September, State Farm Insurance announced a $1.2 billion equity investment in ADT. This partnership allowed State Farm to enter a new category where it can reimagine the homeownership experience and innovate new ways to apply Smart Home technology to home insurance. In addition to the equity investment, State Farm invested up to $300 million in an opportunity fund. This fund investment is a joint endeavor between the two companies, who will work together on product innovation, technology development and marketing processes.
State Farm Chief Operating Officer Paul Smith said the partnership is a way for the insurance giant to move from a "repair and replace" model to a "predict and prevent" mindset, which will (hopefully) add more value for its customers​.
As part of the partnership, and building upon ADT’s existing relationship with Google, the companies will combine next-generation security, innovative smart home technology and reimagined risk-mitigation capabilities to monitor, detect, help prevent and optimize against homeownership risks​.
After the equity investments and the tender offer closes, State Farm will own approximately 15% of ADT and Google will own a 6% stake. This 21% collective stake is great news for investors, especially at this price point. Google is one of the most dominant technology companies on Earth with its Nest product line of camera doorbells a huge growth opportunity. Additionally, State Farm is one of the largest insurance firms with the leadership role in homeowner's insurance. These companies are looking for big returns from this investment.
To that end, investors should be optimistic that ADT will be able to sustain consumer interest through new products (like Solar) and much-needed IT enhancements. The company recently introduced the ADT+ application that supports the company's self-setup line of DIY smart home security products that integrate with Google Nest offerings.
Bottom line
If ADT can pay down its long-term debt, which currently sits at $9.37 billion, and stabilize its operating expenses, which currently eat up 80% of gross profit, it could be one of the best companies to own. Aside from Google and State Farm, Apollo Global still owns 57% of the company. So more than 78% of its outstanding shares are in the hands of three large players that I would not expect to lose money on the investment.
Moreover, analysts expect ADT to surpass more than $7 billion in revenue during 2024 and book between 33 cents and 59 cents per share in earnings. Value Line has the latter at 70 cents, which if right at the current price-earnings multiple would translate into a 100% gain from today's market value. That risk-reward ratio seems like one that makes sense.
