Alarm.com Holdings, Inc. (ALRM) and ADT Inc. (ADT) are two U.S. based companies that offer cloud-based and other smart home security solutions for residential and commercial properties internationally. While ALRM provides interactive security products and connected security devices to control and monitor security systems, ADT offers fire detection, fire suppression, video surveillance, and premises access control systems.
Like most industries, the home security systems market was hit hard by the global public health crisis. Supply chain disruptions and reduced demand for security solutions from major markets such as the U.S. and China adversely affected the sales of security systems and devices offered by ALRM and ADT.
While growing awareness of home security products and the emergence of high-tech systems could lead to a spike in demand for security devices to keep homes safe and secure, high installation and maintenance costs associated with these systems could limit the industry’s growth prospects in the near term.
Over the past year, ALRM has returned 115%, while ADT gained 91%. But in terms of year-to-date performance, ADT is the clear winner with 5.6% gains versus ALRM’s negative returns. But are either of these stocks a good pick now? Let’s find out.
Last month, ALRM completed a joint integration with OpenEye—a cloud video platform—to offer users enhanced video verification solutions and advanced real-time alerts. This should strengthen ALRM’s platform and help expand the company’s commercial solutions to meet customer needs.
Also in March, the company collaborated with CalAmp, a vehicle telematics solutions provider, to provide vehicle monitoring solutions and more home automation capabilities. This should enable ALRM to offer a seamless user experience because it extends Alarm.com’s technology and benefits to include vehicles.
In February, ADT collaborated with DISH Network Corporation to allow DISH access to ADT smart home security products and services. The company has also recently partnered up with Hippo, a home insurance group, to provide homeowners’ insurance and professional monitoring and installation services. This should further expand ADT’s customer base and allow it to add value for its customers.
Recent Financial Results
During the fourth quarter, ended December 31,ALRM’s total revenue increased 18% year-over-year to $165.6 million. However, its operating income declined 10.5% from the prior-year quarter to $13.38 million, while its interest income was $136 thousand compared to $605 thousand for the fourth quarter of 2019.
ADT’s total revenue increased 1.3% year-over-year to $1.32 billion in the fourth quarter ended December 31. But the company’s operating income declined 73.4% year-over-year to $17 million over this period. It reported a net loss of $112 million, compared to a $72 million loss in the prior-year quarter. Furthermore, ADT’s adjusted ebitda was $533 million, representing a decrease of 12.2% from the same period last year.
Past and Expected Financial Performance
ALRM’s net income and levered free cash flow have increased at CAGRs of 22.2% and 38%, respectively, over the past three years. In comparison, ADT’s revenue has increased at a CAGR of 7.2% over the past three years, while its levered free cash flow grew 31.3% over this period.
ADT’s ebitda and total assets have declined at CAGRs of 2.2% and 1.8%, respectively, over the past three years. But the CAGRs of ALRM’s ebitda and total assets have been 12.4% and 25.3%, respectively, over this period.
ALRM’s revenue is expected to rise 7.2% in the current year, and 8.6 % next year. However, a consensus EPS estimate represents a 9.5% decline in the current quarter, and 5.7% in fiscal 2021.
In comparison, the Street expects ADT’s revenue to decrease 2.7% in fiscal 2021. Also, the company’s EPS is estimated to decline 23.6% in the current year.
ADT’s trailing-12-month’s revenue is more than eight times ALRM’s. Also, ADT is more profitable, with a gross profit margin of 71.5% versus ALRM’s 63.2%.
However, ALRM’s EBIT margin of 11% compares favorably with ADT’s 2.9%.
In terms of trailing-2-month price/sales, ALRM is currently trading at 6.67x, 451.2% higher than ADT, which is currently trading at 1.21x. Also, its trailing-12-month’s ev/sales of 6.61x is 111.9% higher than ADT’s 3.12x.
ALRM is also more expensive in terms of trailing-12-month price/cash flow (40.88x vs 5.01x) and trailing-12-month price-to-book (8.90x vs 2.23x).
Both ALRM and ADT have an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Value Grade, both ALRM and ADT have a C, consistent with their higher-than-industry ev/ebit ratios.
Both ALRM and ADT have a Quality Grade of C, given their lower-than-industry cash from operations and ebit margins.
Both ALRM and ADT also have C grades for Momentum, which is consistent with their year-to-date price returns.
Of the 64 stocks in the A-rated Home Improvement & Goods industry, ALRM is ranked #33, while ADT is ranked #56.
In addition to the grades we’ve highlighted, our POWR Ratings system has also rated both ALRM and ADT for Growth, Stability, and Sentiment. Get all ALRM ratings here. Also, Click here to see the additional POWR Ratings for ADT.
While both ALRM and ADT can be considered good long-term investments due to their growing user base in the rapidly expanding smart home and security market, we think this is perhaps not the right time to buy either of these stocks.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Home Improvement & Goods industry.
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ADT shares were trading at $8.44 per share on Thursday morning, down $0.00 (0.00%). Year-to-date, ADT has gained 7.97%, versus a 6.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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