Despite the market’s recent declines, this security system company has announced some very good preliminary results for its last quarter.
NAPCO Security Technologies, Inc. (NSSC)
From BI Research
NAPCO Security is one of the world’s leading solutions providers and manufacturers of high technology electronic security, including door locking systems, access control, home alarm/detection systems to detect intrusion, fire, temperature, or glass breakage, and IoT connected home products.
With its share price cut to $16 back on 3/12, NAPCO announced that it would resume its 500,000 share repurchase plan which has 435,000 shares still to be purchased. The company made its case: “We believe that in light of the prospects that NAPCO has in front of us with the new products recently launched such as the iSecure, Firelink and the expectation of new locking and access control products with recurring revenue in the late summer or fall of 2020, these could lead to continued growth for us. Our recurring revenue from the existing Starlink line of communicators grew 45% year over year in fiscal 2019. As of our fiscal Q2 2020 [ended 12/31] the annualized run rate for [high margined] recurring revenue is now $24 million based on the month of December 2019.
“We also believe that the outlook for school security is strong and should add to our growth in the future as well as being driven by all of the funding legislation that many states have passed over the last year. The total of all the state funding legislation that has been passed is approximately $1 billion dollars. The Federal government has also allocated $100 million dollars per year for the next ten years for school security. Based on these prospects and other factors the company has determined that repurchasing shares at the current levels will be an attractive use of our capital. We are focused on creating shareholder value and with our senior management holding approximately 38% of the shares, our interests are aligned with our shareholders. NAPCO will continue its outreach program to raise awareness of the bright future we believe is ahead.”
NAPCO did not mention COVID-19 in this 3/12 press release, though it would certainly be a great time to install its door locking systems in schools while they are all closed. I imagine business has since slowed as the country goes into lockdown. Here too, I think the best way to look at this is one year out. 2020 is likely somewhat of a bust. Forget about it and assume NAPCO can hit this year’s EPS target of $.84, next year (when analysts otherwise had been foreseeing $1.20).
And, given NAPCO’s growth record I think there is good value here taking the longer term view. That seems to be out of fashion on Wall Street, for now. I don’t know where the stock will bottom, or when, but the stock market usually is looking 6 months out, so we may be about there. I believe this no-debt company will survive just fine.
As I’ve been typing this, the market has opened and NAPCO’s shares are up another 9% today as of 10:30 AM, now at $16.45). The company announced preliminary results for the recent quarter, its fiscal Q3. Despite everything, revenues advanced 4% to $26.2 million and recurring service revenues (primarily alarm monitoring) have now risen to an annualized rate of $25.4.
NAPCO notes that, “results would have been even higher were it not for supply chain interruptions (since remedied) caused by the initial shock of this unprecedented crisis.” The company gave no guidance for what is likely to be a challenging fiscal Q4 (nobody knows) except to say it is doing everything it can to stay safe and to focus on growing future sales and earnings, even if not temporarily in its fiscal Q4, then thereafter. And, of course, recurring revenue should be unaffected.
The company also pointed out, as I did, that it has zero debt. It also has $10 million of cash and $11 million on its revolver. As to having risen 20% in a little over a day to $16.45, the stock has been to (over) $30 in better times on its growth prospects, so while the higher PE’s awarded earlier will likely not return soon, there remains plenty of upside.
Tom Bishop, BI Research, www.biresearch.com, April 6 & 7, 2020