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Security and Safety Services Outlook: Near-Term Prospects Dim

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Demand for security and safety services is on the rise across the globe, especially as a measure to deal with fraudulent activities and to prepare in advance for adverse situations. While developing nations represent attractive market for such service providers, developed nations like the United States, hold solid growth opportunities too.

In the United States, growing adoption of sophisticated technologies, infrastructure development, rising new construction and remodeling activities, and more awareness about safety and security among people and various institutions are building demand for security and safety services.

However, of late, the security and safety services providers are unable to make the most of huge demand. Of many headwinds, availability of labor across various end markets, especially in construction, is a major impediment to growth.

Increase in commodity prices and inflation in other expenses is another concerning factor, which is wiping out the companies’ profit margins. Furthermore, tariffs imposed on import of steel and aluminum as well as on various other items by the Trump government have created uncertainties. In addition to increase in costs of making security products, the import-tariffs have created trade disputes with foreign nations, especially China, impacting international demand for products and services.

Industry Underperforming Sector and S&P 500

Looking at price performance over the past year, it appears that the industry grossly suffered in January 2018. Thereafter, the downtrend continued for months with some recovery recorded June onward. Much of the industry’s sufferings were related to the adverse impacts of raw material cost inflation and those arising from implementation of import tariffs on steel and aluminum.

The Zacks Security and Safety Services Industry, which is a 20-stock group within the broader Zacks Industrial Products Sector, has underperformed its own sector as well as the S&P 500 over the past year. While the stocks in this industry have collectively declined 23.8%, the Zacks Industrial Products Sector has rallied 6.1% and the Zacks S&P 500 Composite has gained 13.5%.

                                             One-Year Price Performance

Security and Safety Services Stocks Trading Cheap

Prevalent headwinds have created weakness for the Security and Safety Services industry; resulting in compressed valuation. It’s worth noting here that the industry is currently trading cheap compared with the S&P 500 and its broader sector.

For valuing Security and Safety Services stocks, the most appropriate multiple is the enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) as the enterprise value not only accounts for equity and preference shares, but also takes into account the debts. Also, EBITDA excludes the impact of non-cash expenses.

The industry currently has a trailing 12-month EV/EBITDA ratio of 10.55, which is below 11.78 for the S&P 500.

                       Industry’s EV-to-EBITDA Ratio (TTM) Versus S&P 500

Also, the industry’s trailing 12-month EV/EBITDA ratio is below 14.14 for the sector.

                       Industry’s EV-to-EBITDA Ratio (TTM) Versus Sector

Moreover, valuing the industry on Price-to-Earnings (P/E) ratio gives us the same picture. The industry’s trailing 12-month P/E ratio is 18.61, below 19.99 for the S&P 500 and 19.32 for the sector.

Bleak Earnings Outlook Underpins Continued Underperformance

The cheap valuation of the industry, though reflects the adversities caused by prevalent headwinds, might be confused as a good entry point by inexperienced investors. Here, we believe that before gaining exposure one should consider whether this group has the potential to perform better than the broader market in the quarters ahead.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is the earnings outlook of its constituent companies. Empirical research shows that earnings outlook for a company has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry (given below) clearly shows the industry’s earnings estimates for 2018 and 2019 as well as its share price performance. A sharp fall in earnings estimates for both 2018 and 2019 was registered in February 2018, while slight recovery was recorded in the following month. Currently, the estimates are fairly stable for both the years.

       Price and Consensus: Zacks Security and Safety Services industry

Though the investor can get a fair view about the industry’s earnings prospects by simply considering the Price and Consensus chart, the magnitude of recent changes in earnings estimates as well as the direction of the change can be helpful too.

                                     Current Year EPS Estimate Revisions

The chart above clearly shows that the current earnings estimates for 2018 are down roughly 27.51% from the year-ago tally, indicating that the analysts currently hold a pessimist view on the industry’s earnings growth potential.

Zacks Industry Rank Indicates Gloomy Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates cloudy prospects in the near term.

The Zacks Security and Safety Services industry currently carries a Zacks Industry Rank #150, which places it at the bottom 41% of more than 250 Zacks industries. 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 the majority of the period in the past eight weeks.

Long-Term Growth Prospects Bright for Security and Safety Services Industry

Despite cloudy near-term prospects, the Zacks Security and Safety Services industry might appeal to long-term investors. The industry promises solid growth potential, as evident from its attractive long-term (3-5) EPS growth estimate.

The group’s mean estimate of long-term EPS growth rate is at 14.61%, way above 9.82% growth rate for the Zacks S&P 500 Composite.

                        Mean Estimate of Long-Term EPS Growth Rate

The basis of the industry’s long-term EPS growth could be the sharp increase in top line since the beginning of 2016. However, first-half of 2018 was not very impressive for the company.

Bottom Line

Security and Safety Services industry is a worthy investment option for long-term investors, with growing global and domestic economies reflective of sound growth opportunities.

However, the industry might not be an appropriate choice for investment in the near term due to the prevalent headwinds. Poor price performance, compressed valuation and falling earnings estimates are reflective of bleak prospects of the industry. Below we provide five companies, with Zacks Rank #4 (Sell), that investors should avoid for now.

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

ADT Inc. (ADT - Free Report) : The stock of this Boca Raton, FL-based company has declined 31.2% over the past year. In the past 60 days, the Zacks Consensus Estimate for earnings has been revised down 10.7% for the third quarter of 2018 while that for 2019 it has declined 0.8%. Estimates for 2018 have remained stable.

                                             Price and Consensus: ADT

Intellicheck, Inc. (IDN - Free Report) : The stock of this Melville, NY-based company has lost 28.5% over the past year. Estimate of loss per share for the current year has widened 8% in the past 60 days.

                                       Price and Consensus: IDN

Lakeland Industries, Inc. : The stock of this Ronkonkoma, NY-based company has declined 8% over the past year. The Zacks Consensus Estimate for current-year EPS has remained stable over the past 60 days.

                                             Price and Consensus: LAKE

Assa Abloy AB (ASAZY - Free Report) : The stock of this Stockholm, Sweden-based company has declined 9.8% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 7.7% downward over the past 60 days.

                                                      Price: ASAZY

G4S plc : The stock of this London-based company has declined 20.4% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 7.7% downward over the past 60 days.

                                                      Price: GFSZY

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