Security company ADT got a strong-buy rating. Why’s that?

Security company ADT got a strong-buy rating. Why’s that?

ADT offers security, fire protection, and other alarm monitoring products and services, helping people all over the U.S. protect their homes and businesses. It attracted Goldman Sachs’s attention due to its solid Q2 performance and potential tailwinds.

 

Analyst George Tong stated that ADT’s Q2 report revealed that revenue, margins, and free cash flow surpassed initial expectations thanks to reduced attrition rates, as well as improved subscriber acquisition cost efficiency. He believes that ADT is uniquely positioned to weather coronavirus pandemic and macro related headwinds. In addition, people’s defensiveness and the importance they put in home security is growing.

 

The company’s residential monitoring business is solid, comprising 80% of its total revenue. And ADT’s improved attrition and subscriber acquisition efficiency only strengthen the stock further.

 

Analysts expect free cash flow (FCF) over the near-term to benefit from improving subscriber acquisition cost-efficiency and raising retention rates. It’s more cost-effective to retain a customer than it is to get a new one.

 

According to Tong, ADT’s consumer financing program has the potential to drive upsell, contributing to better FCF trends. When commercial growth continues, it will also lift FCF performance, as commercial customers pay a greater proportion of their installation costs upfront.

 

ADT is partnering with Google

 

Furthermore, the increasing importance of suburbanization and home security due to COVID-19 could act as tailwinds that bolster growth in FCF. The company recently announced that it is beginning a long-term partnership with Google, which is another benefit for a strong FCF.

 

ADT will likely begin to see material financial benefits from the partnership in 2022. This will be a result of the two companies launching the joint professional install platform. Moreover, Google announced that it would make a $450 million equity investment in ADT. Its statements increased analysts’ confidence in the companies’ commitment to the alliance.

 

Considering all these facts, Tong gave ADT a strong-buy rating, with a $17 price target. Shareholders could gain 45% over the year with this stock.

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