Weekly Equity Idea Highlight - 2020 05 18
ADT has a robust high return and stable business model that the market is misunderstanding.The market is expecting UAFRS-based (Uniform) ROA (ROA') to fade from 48% in 2019 to 19% in 2024, with Uniform asset growth slowing to a modest 3% a year going forward.
The market does not think the company's returns and business model is sustainable, even though the company has consistently generated these high returns for decades. The market also appears to be expecting increased competition from do-it-yourself companies that could disrupt the business when the smart-home world has made the company's churn lower, not higher.
Along with an overly pessimistic outlook for the company's operations, the market appears concerned about ADT's leverage. Uniform Accounting analysis shows the company should have no issues servicing its obligations going forward.
ADT's management is aligned to focus on higher growth, higher margin business going forward, not to just chase growth in a way that could lead to significant ROA' compression as the market is expecting.
Also, while earnings call analysis highlights management may be concerned about near-term coronavirus disruptions, the company is not concerned about competitive pressures or disruption. If anything, they are confident about their customer and dealer-partner relationships.
Considering the overly pessimistic market outlook for both ADT's operations and credit, the company's sound strategy and strong execution, and management's lack of concerns about operations, there appears to be significant equity upside for ADT.
ADT is a provider of monitored security and interactive home and business automation solutions in the United States and Canada. The company's monitored security and automation offerings involve 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; and address personal emergencies. The company's products and services include interactive technologies to allow its customers to remotely monitor and manage their residential and commercial environments by adding automation capabilities to its monitored security systems.
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