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Prospects Bleak for Security and Safety Services Industry

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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:

  • Growing awareness about security and safety of workers and facility infrastructure as well as the need to deal with ever-increasing fraudulent activities has given a boost to the global security and safety market. Emerging nations, with high industrial activities, represent an attractive market for security and safety product and service providers. Also, developed nations like the United States offer solid opportunities to industry players owing to growing adoption of sophisticated technologies, infrastructure development, increasing demand from non-residential market and rise in remodeling activities.
     
  • Innovation plays a vital role. 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 their product portfolio and geographical footprint. Such massive investments often leave the companies with a highly leveraged balance sheet. Johnson Controls International plc (JCI - Free Report) had long-term debt amounting to $6.8 billion as of Jun 30, 2019. Also, sourcing labor in various end markets, especially in construction, is a pressing concern. Adding to the woes are an uptick in commodity prices, inflation in other expenses, adverse impact of tariffs and high logistic costs, which are eating into margins.
     
  • Of late, softness in the construction market in Canada is creating problems for some of the industry players. For instance, Fortune Brands Home & Security, Inc.’s cabinetry products recorded weak sales in Canada in second-quarter 2019. For the near term, the company predicts softness in Canadian operations. Another company, ADT Inc. (ADT - Free Report) recently agreed to divest its Canadian operations, believing the move will help it focus on high margin business in the United States. On the other hand, Allegion plc (ALLE - Free Report) ceased operations at its Turkey-based production facility in second-quarter 2019.


Zacks Industry Rank Indicates Weak Prospects

The Zacks Security and Safety Services industry is a 22-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #173, which places it in the bottom 32% 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 dull 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.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of gloomy 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 down roughly 31.9%.
 
Despite the grim outlook, we present a few stocks that have the potential to perform better than the market. But before we discuss the stocks, it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 & Sector

The Zacks Security and Safety Services industry has outperformed the S&P 500 and its sector in the past year. While stocks in this industry have collectively increased 9.7%, the S&P 500 has gained 7.3%. The Zacks Industrial Products sector has however declined 0.1% in the said time frame.
 
 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 9.32. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 11.73 and the sector’s 15.29.

Over the past five years, the industry has traded at the highest level of 53.31X forward 12-month EV/EBITDA and lowest level of 4.65X. The median level, over the same period, was 9.18X.

          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. The majority of the stocks within this 22-stock industry currently carry a Zacks Rank #3 (Hold) or 4 (Sell) or 5 (Strong Sell). Nonetheless, we present four stocks, with a Zacks Rank #2 (Buy) 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) : Stock of this Tysons, VA-based company has increased nearly 5.8% in the past year. The Zacks Consensus Estimate for the company’s 2019 earnings per share has remained stable in the past 60 days. It indicates year-over-year growth of 5.3%. Estimates for 2020 earnings have increased 0.6%.

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

                                       Price and Consensus: ALRM



Brady Corporation (BRC - Free Report) : The stock of this Milwaukee, WI-based company has increased 35.5% over the past year. Its earnings estimate for fiscal 2020 (ending July 2020) has increased 2.4% while that for fiscal 2021 (ending July 2021) expanded 9.6% in the past 60 days.

                                        Price and Consensus: BRC



Lakeland Industries, Inc. (LAKE - Free Report) : The stock of this Ronkonkoma, New York-based company has lost 16.8% in the past year. The Zacks Consensus Estimate for its fiscal 2019 (ending January 2020) earnings per share has risen 200% in the past 60 days while that for fiscal 2020 (ending January 2021) rose 16.7%.

                                      Price and Consensus: LAKE



Halma     plc (HLMAF - Free Report) : Over the past year, the stock of this U.K.-based company has increased nearly 40.7%. The Zacks Consensus Estimate for fiscal 2020 (ending March 2020) earnings per share has increased 2.9% while that for fiscal 2021 (ending March 2021) grew 4.1% in the past 60 days.

                                    Price and Consensus: HLMAF



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