ADT - ADT: Transformation Is Making Some Progress

2024-01-04 17:43:23 ET

Summary

• Today, we take a deeper look at well known security concern ADT Inc.
• The company recently sold its commercial security business for $1.6 billion, using the proceeds to pay down its considerable debt.
• While challenges remain, ADT's core business is seeing decent growth, and its debt has seen an upgrade from Moody's.
• An analysis of ADT, Inc. follows in the paragraphs below.

The best security against the future is to act in the present ." - Unknown.

Today, we put ADT Inc. ( ADT ) in the spotlight for the first time. The stock is trading roughly at 20% above the levels where some insiders acquired more shares in May of last year. This followed a big drop in the stock following guidance cuts that came out with first quarter results.

In August, ADT announced it was selling its commercial security, fire, and life safety business unit to a private equity firm for $1.6 billion. This sale was completed in October. The proceeds were primarily used to pay down long-term debt and improve ADT's coverage ratios.

Two weeks ago, ADT disclosed that its current CFO was leaving the company to become CEO for another non-security related concern. So, what's ahead for this well-known security company in 2024? An analysis follows below.

Company Overview:

ADT, Inc. is headquartered just five miles to my south in Boca Raton, FL. The company provides security, automation, and smart home solutions. Its primary business is providing monitored security and automation solutions, including the installation and monitoring of security and premises automation systems designed to detect intrusion, control access, sense movement, smoke, fire, carbon monoxide, flooding, temperature, and other environmental conditions and hazards. ADT also offers residential solar solutions. The stock currently trades near $6.50 a share and sports an approximate market capitalization of $5.9 billion.

Third Quarter Results:

The company posted its Q3 numbers on November 2nd. The company delivered non-GAAP earnings per share of eight cents a share, double expectations. Revenues dropped 25% on a year-over-year basis to $1.2 billion, some $380 million below the consensus, which had not fully accounted for the disposal of the commercial business via its recent sale as well as a deep decline in solar revenues (more on that below).

On a GAAP basis, the company had a net loss of two cents a share due to an $88 million goodwill impairment from its solar business. Of note, management is streamlining ADT's Solar business by focusing on the top performing markets. This should result in cost reductions, which is much needed given the year-over-year drop in revenues from this part of the business.

Management provided the following updated FY2023 guidance to account for the sale of its commercial business, challenges in its solar business, and strength in its core businesses serving consumers and small business where revenues were up 6% on a year-over-year basis in the third quarter. Of note, EPS estimates were raised nicely.

Analyst Commentary & Balance Sheet:

Since third quarter results were posted, Goldman Sachs maintained its Buy rating on ADT while RBC Capital reissued its Hold rating with a $10 price target. In August, following second quarter results, Barclays reissued its Sell rating and $8 price target, and Morgan Stanley maintained its Hold rating with an identical price target.

Just under 10% of the outstanding float in these shares are currently held short. Several insiders including the company's CEO purchased approximately $1.3 million shares collectively in the high $4s/low $5s in May of this year. Another insider bought just over $45,000 worth of stock at just over six bucks a share in early September. That was the last insider activity in this equity, however.

The proceeds from the sale of ADT's commercial business did significantly reduce its leverage ratio. However, the company did end the third quarter with just under $7.7 billion of long-term debt . ADT recently refinanced approximately $1.4 billion of debt extending the maturity from 2026 to 2030. This also reduced borrowing costs by approximately 35 basis points and elicited a debt upgrade from Moody's to "Ba3" from "B1."

Verdict:

The company made 24 cents a share on $6.39 billion in FY2022. The analyst firm consensus has profits rising to 40 cents a share in FY2023 even as revenues fall to $5.49 billion. In FY2024, they project earnings of 50 cents a share even as sales fall an additional four percent for the year.

ADT Inc. seems to be making some solid progress in streamlining its business and reducing debt and leverage. The market is currently valuing the stock at 16 times earnings, and the shares also pay a just over two percent dividend yield. Reasonable, but not compelling taking into account the company's still considerable debt load. While this potential turnaround situation is a story worth keeping an eye on yet, ADT Inc. doesn't meet my investment criteria yet.

They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety. " - Benjamin Franklin.

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