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Investors Should Not Fear, Protect Your Portfolio with ADT

March 24, 2014 | About:

The ADT Corporation (ADT) is a provider of electronic security, interactive home and business automation and related monitoring services in the U.S. and Canada (about 6.5 million residential and small business customers).

ADT Pulse

The company’s electronic security and home/business automation offerings involve the installation and monitoring of residential and business security and premises automation systems designed to detect intrusion, control access and react to movement, smoke, carbon monoxide, flooding, temperature and other environmental conditions and hazards, as well as to address personal emergencies, such as injuries, medical emergencies or incapacitation.

Through the introduction of ADT Pulse in 2010, the company's 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 all from their smartphone. Depending on their service plan, practically all can remotely monitor and manage in their homes and small business environments. The company 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.

Strategies

Expanding its channels, improving sales force effectiveness and strengthening its strategic marketing are strategies being considered to grow in actual markets. With respect to new markets or the ones that are not penetrated so much, ADT plans to invest in growth platforms, with focus on market for small businesses and penetration of residential markets. The company´s estimations about those markets indicate that was about $13 billion in 2012, and had grown at a compound annual rate (CAGR) of about 1% to 2% over the past five years.

Returning Cash

ADT recently announced a quarterly dividend, which is scheduled for Wednesday, May 21. Investors of record on Wednesday, April 30, will be paid a dividend of $0.20 per share. This represents a $0.80 annualized dividend and a dividend yield of 2.7%, which is considered quite good to protect consumers' purchasing power.

Insider Trading

Ferber Alan, who is president of Residential at ADT Corporation, bought 1,000 shares at an average price of $28.53 on March 14, 2014, for a total transaction of $28,530.00. Alan now owns 16,973 shares in the company, valued at approximately $484,240.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 15.5x, trading at a discount compared to the industry. Earnings per share (EPS) decreased in the most recent quarter compared to the same quarter a year ago. The company reported $0.43 EPS for the quarter, missing the Thomson Reuters consensus estimate of $0.49 by $0.06. Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

ADT

The ADT Corp

9.74

ECOL

US Ecology, Inc

13.89

CTAS

Cintas Corporation

14.33

AXR

Amrep Corporation

-3.91

As we can see, the firm has a higher ROE than Amrep Corporation (AXR) but is well below the one registered by US Ecology Inc. (ECOL) and Cintas Corporation (CTAS).

Final Comment

As outlined in this article, the well-recognized and reliable brands and products like ADT Pulse will create a range of opportunities for ADT. Additionally, we describe strategies that will speed company´s customer base. Moreover, dividend payment affirms its commitment to maximize shareholder wealth. Finally, insider trading makes me feel bullish about this company’s future profitability.

According to Yahoo Finance, the estimated one-year target share price is $42.5, so if you buy shares at current market price ($29.1), your return from price appreciation would be 46%. 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 an investment for a stock, and in this case is 2.7%. So the total expected return for investing in ADT is 48.7%, which is a tremendous stock return.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Paul Tudor Jones (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), Larry Robins and recently Dodge & Cox have also invested in it.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


Rating: 3.3/5 (6 votes)

Voters:

Comments

whiteandbluepinstripes
Whiteandbluepinstripes - 5 months ago

Until the next batch of quarterly results come though, this company is little more than a day to day trade for the prudent and attentive investor, not a long term investment. There are too many variables that are un accounted for and unexplained:

1) Declining revenues

2) Unknowns with regard to new entrants into the market

3) Declining customer count

4) Un explainable high G&A expenses

5) A new debt heavy capital structure as a result of the Meister debacle

6) Unknown stockholder law suits and resulting liabilities and costs

7) Vringo settlement costs are undisclosed

The reality of the fact is that the last two quarterly management calls have resulted in mediocre resutls, and management has done a poor job of explaining why. For every investor listed here who has invested in the stock, two have dumped it since it went public, and the company has bought back the rest resulting in cash depletion and increased debt. After all that the stock sits at near historic lows with a 2.7% yield, and dropping bond ratings. This company has its name and name only, and while this is a sizable asset, I rarely invest in goodwill and goodwill alone.

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