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Security and Safety Services Industry: Near-Term Outlook Grim
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The Zacks Security and Safety Services industry comprises companies that provide sophisticated and interactive security solutions and related services. Such products and services are mainly used for residential, commercial and institutional purposes. Meanwhile, a few industry players develop electrical weapons for personal defense as well as military, federal, law enforcement and private security.
There are also companies that provide solutions for recovery of stolen vehicles, wireless communication devices, equipment for safety of facility infrastructure and employees, variety of services to automobile owners and insurance companies and products for detecting hazards. Many of these companies serve manufacturing, electronics, construction, telecommunications, aerospace, medical and others end markets.
Here are the three major industry themes:
Rise in industrial activities, growing awareness about security and safety of workers and facility infrastructure and the need to deal with ever-increasing fraudulent activities have given a boost to the global security and safety market. Developed nations like the United States have solid opportunities owing to growing adoption of sophisticated technologies, infrastructure development and rising new construction and remodeling activities. Developing nations are also emerging as an attractive market for security and safety product and service providers.
Innovation plays a vital role for the industry. Constant update of products and services is required to keep up with changing customer needs, making steady investments necessary. In addition to these, the companies often make acquisitions to broaden product portfolio and geographical footprint. Such massive investments often leave the companies with a highly leveraged balance sheet.
Of late, these companies are faced with a number of hurdles. Difficulty in sourcing labor in various end markets, especially in construction, is a pressing concern. An uptick in commodity prices and inflation in other expenses are other factors eating into the margins of such companies. Furthermore, tariffs imposed on the import of steel and aluminum as well as on various other items by the Trump government have created uncertainties. In addition to bumping up production costs, the import tariffs have given rise to trade disputes with nations like China, impacting international demand for products and services.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Security and Safety Services industry is a 21-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #168, which places it at the bottom 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half of the rank list for majority of the past eight weeks.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of cloudy earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have moved roughly 26% down.
Despite the grim outlook, we present a few stocks that have the potential to perform better than the market. Before we discuss the stocks, it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms S&P 500 & Sector
The Zacks Security and Safety Services industry has underperformed the S&P 500 and its sector in the past year. While stocks in this industry have collectively declined 19.7%, the S&P 500 has declined 9.6% and the Zacks Industrial Products sector was down 19.2%.
One-Year Price Performance
Security and Safety Services Industry’s Valuation
EV/EBITDA ratio is commonly used for valuing security and safety services stocks.
The industry’s forward 12-month EV/EBITDA ratio is 7.16. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 9.80 and the sector’s 10.88.
Over the past three years, the industry has traded at the highest level of 53.32x forward 12-month EV/EBITDA ratio and lowest level of 4.62x. The median level, over the same period, was 9.07x.
Security and Safety Services Industry’s Valuation Versus Sector
Security and Safety Services Industry’s Valuation Versus S&P 500
Bottom Line
Despite some long-term tailwinds, we believe that the industry might not be an appropriate choice for investment in the near term due to the prevalent headwinds. Poor price performance, overvaluation and falling earnings estimates are reflective of the bleak industry prospects.
Majority of the stocks within this 21-stock industry currently carry a Zacks Rank #3 (Hold) or 4 (Sell) or 5 (Strong Sell). Nonetheless, we present four stocks, with favorable rank and impressive earnings prospects, which investors might be interested in.
A brief discussion on the chosen stocks is provided below:
Alarm.com Holdings, Inc. (ALRM - Free Report) : This Tysons, VA-based company currently sports a Zacks Rank #1 (Strong Buy). Over the past year, the stock has gained nearly 59.7%. The Zacks Consensus Estimate for the company’s 2019 earnings per share has remained stable in the past 60 days but reflects year-over-year growth of 7.8%.
Axon Enterprise, Inc. : The stock of this Scottsdale, AZ-based company has surged 74.6% over the past year. Though stable in the past 60 days, the Zacks Consensus Estimate for 2019 earnings per share reflects year-over-year growth of 14.5%. The stock currently sports a Zacks Rank #1.
Price and Consensus: AAXN
Ituran Location and Control Ltd. (ITRN - Free Report) : The stock of this Azor, Israel-based company has lost 6.6% in the past year. The Zacks Consensus Estimate for its 2019 earnings per share has risen 20.8% in the past 60 days. Also, the estimate reflects year-over-year growth of 25.8%. The stock currently sports a Zacks Rank #1.
Price and Consensus: ITRN
Resideo Technologies Inc. (REZI - Free Report) : The stock of this Golden Valley, MN-based company currently has a Zacks Rank #2 (Buy). Over the past three months, the stock has declined nearly 20.5%. Meanwhile, the Zacks Consensus Estimate for 2019 earnings per share has surged 313% in the past 60 days.
Price and Consensus: REZI
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Image: Bigstock
Security and Safety Services Industry: Near-Term Outlook Grim
The Zacks Security and Safety Services industry comprises companies that provide sophisticated and interactive security solutions and related services. Such products and services are mainly used for residential, commercial and institutional purposes. Meanwhile, a few industry players develop electrical weapons for personal defense as well as military, federal, law enforcement and private security.
There are also companies that provide solutions for recovery of stolen vehicles, wireless communication devices, equipment for safety of facility infrastructure and employees, variety of services to automobile owners and insurance companies and products for detecting hazards. Many of these companies serve manufacturing, electronics, construction, telecommunications, aerospace, medical and others end markets.
Here are the three major industry themes:
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Security and Safety Services industry is a 21-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #168, which places it at the bottom 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half of the rank list for majority of the past eight weeks.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of cloudy earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have moved roughly 26% down.
Despite the grim outlook, we present a few stocks that have the potential to perform better than the market. Before we discuss the stocks, it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms S&P 500 & Sector
The Zacks Security and Safety Services industry has underperformed the S&P 500 and its sector in the past year. While stocks in this industry have collectively declined 19.7%, the S&P 500 has declined 9.6% and the Zacks Industrial Products sector was down 19.2%.
One-Year Price Performance
Security and Safety Services Industry’s Valuation
EV/EBITDA ratio is commonly used for valuing security and safety services stocks.
The industry’s forward 12-month EV/EBITDA ratio is 7.16. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 9.80 and the sector’s 10.88.
Over the past three years, the industry has traded at the highest level of 53.32x forward 12-month EV/EBITDA ratio and lowest level of 4.62x. The median level, over the same period, was 9.07x.
Security and Safety Services Industry’s Valuation Versus Sector
Security and Safety Services Industry’s Valuation Versus S&P 500
Bottom Line
Despite some long-term tailwinds, we believe that the industry might not be an appropriate choice for investment in the near term due to the prevalent headwinds. Poor price performance, overvaluation and falling earnings estimates are reflective of the bleak industry prospects.
Majority of the stocks within this 21-stock industry currently carry a Zacks Rank #3 (Hold) or 4 (Sell) or 5 (Strong Sell). Nonetheless, we present four stocks, with favorable rank and impressive earnings prospects, which investors might be interested in.
A brief discussion on the chosen stocks is provided below:
Alarm.com Holdings, Inc. (ALRM - Free Report) : This Tysons, VA-based company currently sports a Zacks Rank #1 (Strong Buy). Over the past year, the stock has gained nearly 59.7%. The Zacks Consensus Estimate for the company’s 2019 earnings per share has remained stable in the past 60 days but reflects year-over-year growth of 7.8%.
(You can see the complete list of today’s Zacks #1 Rank stocks here.)
Price and Consensus: ALRM
Axon Enterprise, Inc. : The stock of this Scottsdale, AZ-based company has surged 74.6% over the past year. Though stable in the past 60 days, the Zacks Consensus Estimate for 2019 earnings per share reflects year-over-year growth of 14.5%. The stock currently sports a Zacks Rank #1.
Price and Consensus: AAXN
Ituran Location and Control Ltd. (ITRN - Free Report) : The stock of this Azor, Israel-based company has lost 6.6% in the past year. The Zacks Consensus Estimate for its 2019 earnings per share has risen 20.8% in the past 60 days. Also, the estimate reflects year-over-year growth of 25.8%. The stock currently sports a Zacks Rank #1.
Price and Consensus: ITRN
Resideo Technologies Inc. (REZI - Free Report) : The stock of this Golden Valley, MN-based company currently has a Zacks Rank #2 (Buy). Over the past three months, the stock has declined nearly 20.5%. Meanwhile, the Zacks Consensus Estimate for 2019 earnings per share has surged 313% in the past 60 days.
Price and Consensus: REZI
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>