ClaudineVM/iStock Editorial via Getty Images
Last summer, I thought security was on the rise in a case Access time (New York Stock Exchange: ADT). Trading at $6 and change, I concluded that the company was struggling due to a lack of something real and tangible Results from its partnership with Google and move into the solar business, which has raised some questions.
At the same time, the underlying performance became more resilient amid rising sales and profits, as the company furthermore announced a significant divestment in its business, in order to reduce debt. In due course, the company announced an exit from its solar business as well, and while the core business continues to grow, all of which leads to improving traction, I’m still hesitant to pull the trigger.
Shed some perspective
ADT, which claims to be North America’s largest security company, has gone public at $14 each Company share in 2018. Despite its reported 30% market share, the company was struggling to achieve real GAAP profits, amid a debt-laden balance sheet, although the company focused on safe and growing cash flows, supported by Supply and maintenance contracts. In fact, as of today, the company offers these services to over 6 million subscribers, believing in ADT for its long heritage of over 150 years in the industry.
At the time of the offering, ADT had a massive enterprise valuation of $19 billion, buoyed by a company that had sales of $4.3 billion and EBITDA of $2.3 billion. With EBITDA numbers including the huge DA factor, I saw minimal earnings, and they were not enough to support such a debt load. Investors have recognized this as well, with shares falling to the $5 mark in 2019.
Shares rose again to the $14 mark in 2020 following a tie-up with Google’s Nest, with Nest investing nearly half a billion in exchange for a stake in the company. By 2021, the company’s sales had increased by $1 billion to $5.3 billion, although EBITDA was largely flat compared to 2019.
The company announced an $825 million deal to acquire Sunpro Solar in 2021 to add solar offerings to its portfolio. This brought some turnover, with 2022 sales reaching $6.3 billion, while the impact on EBITDA was largely flat. In the end, the company increased its 2022 sales to $6.4 billion, with adjusted earnings of $0.24 per share.
Net debt of $9.4 billion remained high, with adjusted EBITDA of $2.4 billion, a leverage ratio of 3.9x. The company has guided 2023 sales to advance further to $6.60-$6.85 billion, with expected EBITDA of about $2.575 billion, which at the midpoint should translate into adjusted earnings of $0.35 per share. The company lowered sales guidance to $6.4 billion along with second-quarter earnings numbers amid declining solar sales, as the company maintained EBITDA and earnings guidance.
With 917 million shares trading at $6.50 per share, the company received an equity valuation of $6.0 billion last summer, as the company racked up a net debt load of $9.3 billion. The enterprise’s $15.3 billion valuation will see a modest impact from the $1.6 billion sale of its trading business, a $1.2 billion business that generated EBITDA margins of about 10%.
Under the deal, the company will see about 20% of sales go out the door, but these activities are much lower margin. Furthermore, leverage should be reduced to 3.3 times EBITDA. The company claimed that the debt reduction and associated interest rate expenses avoided were more accretive than the lost earnings power of the activities.
All of this has me warming up to ADT shares a bit, which is not to conclude that I rushed in and bought some shares. From last summer to today, shares largely traded in a $6-$7 range, and are now trading just above the upper end of the range.
What happened?
In January, ADT announced it would exit the residential solar business, in order to focus on its core security and smart home businesses. This came after the unit recorded an EBITDA loss of $89 million in the first three quarters of the year. Meanwhile, the company announced a staggering 57% increase in quarterly earnings to $0.055 per share, as well as announcing a $350 million stock buyback program.
In February, the company reported full-year revenue of $4.98 billion, down modestly from the previous year, after adjusting for the sale of the business of course. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved modestly to $2.36 billion, with the company reporting adjusted earnings of $0.51 per share, while net debt was reported at $7.7 billion.
For 2024, the company guided for lower sales of between $4.8 and $5.0 billion, seeing adjusted EBITDA at the midpoint of $2.575 billion, allowing adjusted earnings to improve to the midpoint of $0.65 per share. Most of these improvements relate to the collapse of its solar business, whose revenue fell 58% in 2023 to just $330 million in revenue, while accounting for a massive $117 million adjusted EBITDA loss.
In March, the selling shareholder Apollo sold a significant portion of shares at $7 and changed hands, because of course this does not benefit the company. What is important is that this sale reduced Apollo’s equity stake to less than 50%, which helped the free float of the company.
In late April, ADT reported a 5% decline in first-quarter sales to $1.21 billion, which sounds worse than it is because if we excluded the solar business, revenue would have been up 5%. Furthermore, cost control was demonstrated by adjusted earnings rising five cents to $0.16 per share, while net debt was flat at $7.8 billion amid some early share buybacks.
Following this earnings report, the company maintained its full-year guidance, meaning the stock trades at 10 times adjusted earnings, while the company pays a generous 3% yield.
What now?
The truth is that ADT has made some strides in the past year, despite its ill-advised move toward, and thus elimination of, solar. Overall, net debt has declined slightly as the core business appears to have become of higher quality, with recurring revenue rising, while customer attribution and repayment periods have decreased over the past years.
Moreover, net debt fell from more than 4 times to 3.2 times, despite some recent capital allocation initiatives such as higher dividends and modest share buybacks. In the midst of all this, my confidence in the quality of the business is increasing, while leverage is decreasing, both positive signs.
This comes as the company’s corporate value continues to decline amid deleveraging and the slowdown in the stock price from a historical perspective. Given all this, I continue to gradually warm up to ADT amid share price stagnation, deleveraging, and increasing attractiveness based on continued growth in the underlying business.
I conclude by saying that I have an optimistic stance, but I am not yet ready to pull the trigger, perhaps because the stock price and adjusted earnings continue to decelerate significantly. Amidst all this, I am closely following developments, in order to possibly pull the trigger later.
