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NAPCO Security- Detecting Gains

NAPCO Security (NSSC) is one of the world’s leading solutions providers and manufacturers of high technology electronic security, notes small cap expert Tom Bishop, editor of BI Research.

The firm's products include door locking systems, access control, home alarm/detection systems to detect intrusion, fire, temperature or glass breakage, and other IoT connected home products.

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Earnings for the 4th quarter came in right on target at $0.26 up 30% vs. last year’s $0.20. For the full year, EPS of $0.66 was up 61% over last year’s $.41 and over initial estimates for FY6/19 (at the start of the year) of $0.53. That is an impressive performance.

But the stock has slipped back toward $26 as some investors dove into the minutia and apparently found fault with the company’s gross margin on the equipment revenue side which slipped 3% year-over-year to 37%.

The company said that about 2% of this was discounts offered on the introduction of its new AT&T LTE radio and the other 1% was just mix. In the company’s opinion, there is nothing to be worried about. And the AT&T introduction margin pressure will probably back off a bit in Q3 to 1%.

On the plus side, meanwhile NAPCO is growing its recurring service revenue side of the business which exited the year at a $20 million run rate, is growing at about 45% and is higher margined at 78%.

Accordingly the company said, “we expect that $40 million is the number we’re going to hit in FY6/21.” And that along with growth fueled by new product introductions this year and next, additional funding bills passed for school security.

In addition, greater utilization of its Dominican Republic manufacturing facility is expected to fuel EPS growth of 35% to the consensus expectation of $.89 this fiscal year and $1.20 in FY6/20 (the consensus is actually a heady $1.26).

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And let me just note here that the stock market is not always fair. The EPS estimate for FY6/20 has dropped all of $.02, or 2%, since the Q4 results were released, while the stock has dropped nearly 24%. This sort of thing drives me nuts. However, at the end of the day we’re up 88% so far on this one.

Meanwhile, through all that, EPS was $0.41 two years ago, $0.66 this past year, is forecasted at $0.89 for the current year and over $1.20 for next year. Sometimes Wall Street can’t see the forest through the trees. The shares remain a Buy.

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