ADT has the market lead in providing home security monitoring systems with 6.4 million customers, roughly 25 percent of a highly fragmented market. While ADT isn’t a high growth company compared with some new equity listings, it is growing revenue at more than double the industry average and operates in an environment of limited national competition that make it unlikely that the existing 6 million-plus customer base will switch to competitors anytime soon.
On Monday, ADT shares hit the New York Stock Exchange, rising nearly 3 percent from an offer price just above $35 share to close its first trading day at $37.27. The company, which posted $3.1 billion in 2011 revenue, will become a component of the S&P 500 index replacing Lexmark International.
In a conversation on ADT’s first day of trading, ADT’s Chief Executive Naren Gursahaney highlighted the company’s high brand awareness and market position, while pointing out that 90 percent of ADT subscribers are recurring customers, giving the company strong cash flow dynamics.
With a network of 4,500 in-house sales representatives and an additional 4,000 technicians, the company has to make a big upfront investment in growing the customer count — roughly $1,725 per new subscriber through its direct sales channel and $1,200 through a dealer network of a similar size, according to Morningstar. However, Gursahaney notes new ADT subscribers become cash flow positive for the company in just under three years — the life of an initial subscription — highlighting the value of a 90 percent recurring customer base.
“I think that this will continue to be a strong growth story,” said Gursahaney, who highlights the fact that ADT’s recurring subscriber revenue grows at between 5 percent to 7 percent a year. That compares with an industry that has grown just 10.6 percent over the past six years to $12.5 billion in revenue, according to ADT research.
While ADT’s existing brand already tracks at a faster growth rate than the industry, Gursahaney said the company has a “tremendous runway for growth,” as it develops its more technologically advanced ADT Pulse — a home security product that leverages new technologies to connect mobile devices, media and automation — which could draw in new subscribers into home security systems that cost $50 a month versus base offerings that cost $40 a month. Meanwhile, existing subscribers may look to upgrade, given the platform’s mobile connectivity and its use of cutting home security automation technologies.
The Pew Internet Project reports that half of American adults now own a smartphone or tablet (45 percent of adults own a smartphone specifically; 18 percent a tablet or e-reader).
To continue expanding ADT Pulse, Gursahaney said he will look at mergers and acquisitions, especially in the software, services, and mobility spaces that could be a benefit to the platform’s overall suite of products. “Being the market leader in the residential security space, we see everything that is available,” said Gursahaney. In 2010, ADT’s bought Broadview Security — the owner of competitor Brink’s home security business — for $2 billion.
The ADT Pulse push comes as some of ADT’s existing “moat” becomes threatened by far-larger cable and telecom giants that are now building out cutting-edge home security products. While Gursahaney acknowledged the competition, he noted that for investors, ADT has a first-mover advantage and it is the only pure-play public company with exposure to home security and the industry’s next tech-enabled suite of products.
Gursahaney’s pitch on the stability and growth prospects of ADT meshes with initial stock analysis of the offering. Morningstar IPO analyst James Krapfel highlighted ADT as the newly traded S&P 500 member to buy over Kraft Foods Group, citing its 10 percent valuation discount. Krapfel gives ADT a $40 a share price target and highlights ADT’s strong market position and ability to make new subscribers additive to profits and cash flow within one subscription cycle.
Although ADT is spinning off from Tyco — once a conglomerate in the Dow Jones Industrial Average before a string of spin-offs that’s culminated in ADT’s listing — Krapfel said the company is also equipped to ward off far larger media conglomerates with its Pulse platform.
“With ADT Pulse, ADT is at the forefront of the industry move to interactive service offerings, such as the ability to remotely lock and unlock doors, control thermostats and lighting, and conduct video surveillance," said Krapfel in a Monday note to clients analyzing new listings. “This should put the company increasingly head-to-head with the likes of Comcast and AT&T, which are pushing their own interactive home monitoring solutions, but we think ADT should come out on top,” he adds. (Disclosure: Comcast is the majority owner of NBC Universal, the parent company of CNBC and CNBC.com.)
For investors looking for a stable housing-themed investment with a hint of Warren Buffett’s “moat” approach — not to mention his major bet on the U.S. housing market — ADT’s existing subscriber strength, its growth rates, and the company’s pure-play exposure to residential security make it a compelling investment. Meanwhile, as the company builds on its Pulse platform to grow new subscribers, ADT is also a way for investors to gain safe exposure to the technological innovations of the Apple iPhone revolution occurring inside an increasing number of U.S. homes.
—By TheStreet.com’s Antoine Gara
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