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Analyst Blog

On Aug 9, Zacks Investment Research upgraded security services provider The ADT Corporation (ADT - Analyst Report) to a Zacks Rank #1 (Strong Buy) from a Zacks Rank #2 (Buy) largely on the back of strong third-quarter fiscal 2014 results and healthy long-term fundamentals.

ADT’s share price has steadily been on an uptrend since May 2014. Despite its strong price appreciation, ADT still has the wherewithal for the stock to climb up. The stock is currently trading at a forward P/E of 18.0x and has long-term earnings growth expectation of 8.9%.

Why the Upgrade?

ADT reported adjusted earnings of 55 cents per share versus 53 cents per share in the year-ago quarter and comfortably beat the Zacks Consensus Estimate by 9 cents. Total revenue increased 1.9% year over year to $849 million, while recurring revenues (which accounted for 92.5% of total revenue) were up 2.7% to $785 million. Recurring revenue growth was largely driven by an increase in average revenue per customer, which was up 3.9% year over year to $41.85.

ADT undertook several key initiatives to accelerate growth, improve cost efficiencies, and optimize capital structure. In order to capture a greater pie in the market, the company invested heavily in its ADT Pulse platform and launched several new products. ADT Pulse take rates climbed to 49% of customer additions, up from 28% in the year-earlier quarter.

During the quarter, ADT reduced customer attrition by initiating tighter credit screening policies, implementing resale efforts and customer loyalty programs. Revenue attrition improved 30 basis points to 13.9% on a sequential basis, while unit attrition in residential and small business channels was up 20 basis points sequentially to 13.5% due to relocations associated with the housing recovery and non-pay customers.

In order to reduce subscriber acquisition costs, ADT implemented new technology and installation procedures and optimized lead management, sales conversion and marketing activities across all channels. The company also collaborated with location-based services and family networking technology provider Life360 to add a new dimension to its expanding portfolio.

Subsequent to the quarter end, ADT closed the acquisition of Reliance Protectron, Inc. – one of the largest security monitoring and installation companies in Canada. With the deal, ADT has strengthened its Canadian presence to better serve over 800,000 local customers with the best of products and solutions along with superior customer service in the security industry. In addition, the strategic buy will offer a steady revenue stream to ADT as Protectron reportedly has higher levels of customer retention than other major players in North America.

All these offer an enticing growth potential for ADT. The solid fundamentals also find confirmation in positive estimate changes, driving the Zacks Consensus Estimate higher both for the current quarter as well as for the fiscal. The Zacks Consensus Estimate for the ongoing quarter and fiscal are currently pegged at 50 cents and $1.97, respectively, representing 7.8% and 7.0% year-over-year growth.

Other Stocks to Consider

Other stocks to watch out for in the industry include CBIZ, Inc. (CBZ - Snapshot Report), The Hackett Group, Inc. (HCKT - Snapshot Report) and Huron Consulting Group Inc. (HURN - Snapshot Report), each carrying a Zacks Rank #2 (Buy).

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