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Why ADT Can Beat the S&P 500

ADT Inc's (NYSE:ADT) stock price has declined 2% in the past year versus a 13% rise for the S&P 500.

However, the security systems specialist could outperform the index in the long run due to its investment in new growth opportunities, the acquisitions is has made and its increasing recurring revenue.

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New growth opportunities

The company signed an agreement with ridesharing mobile app Lyft in the fiscal 2019 third quarter. ADT will provide a new safety feature within the Lyft mobile app that adds an additional layer of security for Lyft's customers and drivers. The feature is expected to launch in a pilot program in the first quarter of 2020 in 9 US markets before being rolled out across Lyft's 30 million riders and two million drivers over the medium term. The agreement could diversify ADT's sales and provide it with a new growth area over the long run.

ADT is piloting a consumer finance offer that does not require its customers to make an upfront payment when purchasing its products and services. Instead, its customers obtain finance and make payments for the duration of their agreement with the company. The finance offer's pilot program has produced improved revenue for the company since it started in the fiscal 2019 second quarter. ADT plans to roll it out across the US, which could catalyze its financial performance.

Changing business model

ADT completed the acquisitions of two companies in the third quarter, FAS Systems and Fusion Fire Protection. These companies increase ADT's exposure to the West and Mid-Atlantic regions of the U.S. and also provide it with access to large national business customers.

In addition, the company acquired video alarm verification business i-View Now in the third quarter. When combined with ADT's existing technology, i-View Now's services could reduce false alarms and offer more accurate emergency service responses to its customers. This will be achieved through ADT using video and sound sensors to analyze whether a specific alarm is a true emergency. This may improve the company's service and enhance its market position when compared to sector peers.

The company's sales per customer could improve due to its ongoing success in selling interactive services. They include live video streaming that can be viewed remotely by its customers. In the fiscal 2019 third quarter, over 80% of the company's residential installations included interactive services. This could boost ADT's recurring revenue and customer loyalty.

Potential risks

ADT's financial performance in fiscal 2019 has been mixed. It recorded a net loss of $182 million in the third quarter, following a net loss in its second quarter. The uncertain US economic outlook could hurt its near-term financial prospects, with consumer confidence having fallen in each of the last three months according to the Conference Board's index. An ongoing trade war between the US and China may lead to consumers and businesses becoming increasingly price-conscious when purchasing security products and services.

The company's recent financial performance has been negatively impacted by one-off items such as goodwill impairments and a loss on the sale of its Canadian operations. Its free cash flow of $459 million for the first three quarters of fiscal 2019 shows that its underlying performance has been sound. The sale of its Canadian business will allow ADT to focus on its more profitable US operations that require less cash and time. This could improve its efficiency and boost its future profitability.

Outlook

Market analysts forecast that ADT will deliver a 7% rise in its earnings per share in fiscal 2020. Its forward price-earnings ratio of 8.5 suggests that it offers good value for money.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.