MCINTIRE INVESTMENT INSTITUTE
AT THE UNIVERSITY OF VIRGINIA
(NYSE : ADT - Long)
Prepared by K. Wey and J. Wulkan, Memo by H. Freund| Jan. 23, 2013
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McIntire Investment Institute
INVESTMENT THESIS
Market Leader:
28% Market Share, Durable Brand, Premium Pricing
ADT Pulse Integrated Security:
Higher ARPU, Lower Churn, Undervalued
Substantial Tailwinds:
Insurance Discounts, Pre-wiring, False-alarm Reduction
Multiple Opportunities to Win:
Share Repurchases, Acquisition Target
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McIntire Investment Institute
FINANCIAL OVERVIEW
Entry point
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Price: $47.98
AvgVol (3m): 1.90M
Operating Margin: 23.14%
Market Cap: $11.15B
P/E (ttm): 28.74
EV/EBITDA: 10.10
Range: $34.68-48.91
Current Ratio: 0.77
Debt/Equity: 0.80
McIntire Investment Institute
ADT IS A MARKET LEADER – 28% SHARE
Market Share Breakdown shows ADT dominates
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McIntire Investment Institute
ADT ABLE TO CONSOLIDATE THE MARKET
Price raises are “great…[ADT raises] rates and
a few people leave for the lower cost
providers, as those smaller players grow
larger, ADT
buys them; everything in this industry leads
to ADT"
ADT’s brand and legacy are significant
competitive advantages, creating “a
phenomenal need, without ADT
people wouldn’t buy home security”
ADT can “get parts for $200.
The same parts cost me
$750-$1200. Hard to
compete….totally depressing
small guys”
Brand image is reinforced by
“advertising…helped make ADT a
household name” (VAR) and expands
the “addressable market
significantly…[as customers] see it in
the mainstream”
GROWTH AT EXPENSE OF MOM & POP DEALERS
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McIntire Investment Institute
INTEGRATED SECURITY – ADT HAS FINGER ON THE PULSE
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McIntire Investment Institute
INTEGRATED SECURITY GROWING AT 23% CAGR
Benefits:
1) Lower attrition rate
2) Higher ARPU
3) ADT leader
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PULSE ADOPTION RATES SET TO INCREASE
VAR: INCREASE IN # OF CUSTOMERS OPTING FOR PULSE (VS. STREET – CONSTANT)
STREET UNDERESTIMATES PULSE ADOPTION
BY 40%
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TAILWINDS TO HOME SECURITY ADOPTION
Insurance discounts
Pre-Wiring
False-Alarm Reductions
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Price
Poor Service
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FAVORABLE VALUATION WITH MULTIPLE WAYS TO WIN
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CABLE OR TELCO BUYOUT YIELDS EVEN HIGHER UPSIDE
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BUYBACK PROVIDES 3RD WAY TO WIN
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McIntire Investment Institute
L-ADT = SUBSTANTIAL RETURNS FOR MII
Higher Pulse
penetration forms
solid base-case
Share repurchases or
ADT acquisition yield
highest upside
potential
Price Target: $61
Upside: 27%
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Home security
tailwinds push ADT to
profitability
Four
Ways to Win
with ADT
ADT continues to
serve as home security
market leader
Pulse propels ADT to higher
price, MII to higher profits
McIntire Investment Institute