Much of our initial ADT (NYSE:ADT) thesis, as we outlined in our fourth quarter 2013 Analyst Corner, proved correct, most notably the company’s continued success in attracting customers to its more advanced Pulse home automation services and a muted impact from new competitors in an already highly-competitive market. We did, however, underestimate the pace of investments required to grow the business in the near term, and consequently, our business value estimate had declined modestly since our initial investment. Even though the predictable, subscription-based nature of its cash flows had not changed and management was making the right decisions to improve the long-term health of its business, the stock languished for much of 2013 and declined precipitously in January 2014 in response to shareholders fatigue.
At these lower prices, ADT shares still traded at a meaningful discount to what we estimated a long-term business owner would be willing to pay for the whole business. Over the next two years, ADT’s shares proved quite volatile as investors alternately cheered and jeered the company’s progress, providing opportunities to add to our holdings under $30, and trim above $40. Then on February 15, 2016, we were greeted with the news that private equity firm Apollo Management Group (owner of ADT’s much smaller competitor, Protection One) had agreed to acquire ADT for $42 per share (a 56% premium to the previous close), a slight discount to our latest business value estimate in the mid $40s and a gain over our average cost of roughly $37.
Despite initial expectations proving too high, by insisting on investing with a margin of safety, we were still able to achieve a positive outcome. Not every error of estimation has ended, or will end, as favorably, but we believe by sticking to our discipline we can minimize the impact of possible mistakes.
From Weitz Funds' Annual Overview of the Small/Mid-Cap Strategy.
