Security monitoring company ADT Inc. is a leader in a growing sector with a strong management team and profitable business model that are not reflected in its stock price, which has been subdued since the company’s $1.6 billion initial public offering last month.
That’s the view of analysts initiating coverage of the stock Tuesday with mostly positive views of the company.
RBC Capital Markets assigned the stock an outperform rating and a $16 price target, or 27% above its current trading level. ADT ADT, -4.18% has a roughly 30% share of the residential security market, which makes it about five times the size of its nearest rival, and a leading presence in the commercial market, analyst Gary Bisbee wrote in a note.
The industry is worth about $27 billion and has been growing at a mid-single-digit percentage rate, including during recessions. “It is also highly fragmented, leaving ADT with several important scale advantages (brand awareness, profitability, and service capabilities, among others),” Bisbee wrote.
The company’s new management under Chief Executive Tim Whall is focused on profitable growth, and not growth at any cost, wrote Goldman Sachs analysts, who initiated coverage with a buy rating and 12-month share-price target of $19.
ADT has made improvements to customer service that have helped lower revenue attrition to 13.8% in the third quarter of 2017 from 16.5% in 2015, according to the Goldman note. It has expanded EBITDA (earnings before interest, taxes, depreciation and amortization) margins to 59% from 52%.
“We believe the metrics-driven approach of the management team can unlock further operational improvements,” wrote Goldman’s analysts, led by George Tong.
That could drive attrition rates down to 12%, and expand EBITDA margins by an additional 270 basis points by 2020, while delivering an incremental step-up in revenue growth, according to Goldman.
Imperial Capital noted that the company enjoys a high level of brand awareness and that it has transformed itself into a player that is far more than the legacy alarm monitoring company that was previously known to investors.
ADT, which has roots in the 19th century, was a public company until February 2016, when it was taken private by Apollo Global Management APO, +1.67% in a $6.9 billion leveraged buyout. The company’s January IPO marked only a partial exit for its private-equity owner, which continues to own the majority of the shares.
ADT offers connected and Internet of Things in-home devices, family monitoring and security, personal emergency response and now cybersecurity, thanks to its acquisition of Datashield in November of 2017, said Imperial analysts led by Jeff Kessler.
“We believe that the market will come to agree with our long-held opinion of the high level of expertise in the current ADT management,” Kessler wrote in a note. “This management has repeatedly demonstrated its ability to substantially increase customer experience scores, which we believe deserves a premium valuation to its direct peers and a smaller discount to other leading business services comps.”
Among the metrics the new team has improved: in January 2016, the longest call waiting time at ADT was 94 minutes; today the company tries to answer all 60,000 daily calls within one minute. As a result, few than 1% of callers today hang up, compared with more than 10% in 2016. And employee turnover has dropped to 40% from 60% as interaction with customers has improved.
Imperial initiated coverage with an outperform rating and a $15 price target.
But Stifel struck a more cautious tone in a note offered as a primer on the overall home security business and the questions raised by ADT’s IPO prospectus.
Analyst Shlomo Rosenbaum compared what is the same at ADT as compared with when it was public before with what has changed and found it no longer makes certain disclosures that would clearly help understand the state of the underlying business.
For example, the company used to provide unit and revenue attrition metrics, but now only provides gross customer revenue attrition, he said. Subscriber counts were provided on a quarterly basis in the past, but are not provided at all now.
“We believe the subscriber base in terms of units has been shrinking,” he wrote. The sector has come under competitive pressure from new entrants that include broadband players like Comcast Corp. CMCSA, +1.09% ; technology players like Google parent Alphabet Inc. GOOGL, -0.04% , which owns Nest and Dropcam; point solutions like Ring, innovative single device providers like Canary; and growth in do-it-yourself providers like SimpliSafe.
Gross additions were another feature of quarterly reports with a breakdown of how many came from the dealer channel and how many from the internal channel, said Rosenbaum. The company is no longer providing an update of subscriber acquisition costs. And its debt levels have significantly increased thanks to the LBO, he said.
“Since the key drivers of the business are subscriber acquisition costs, average revenue per subscriber (or recurring monthly revenue, also know as RMR), and attrition, we believe it is tough to gauge what is really going on in the business from public filings,” said Rosenbaum, who has not offered a rating for the stock.