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Bet on Security and Safety Services Despite Macro Uncertainties

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There is an entire paradigm shift happening in the security and safety services market, mainly because of the adoption of IP-based cameras. Being connected to the Internet, these cameras allow remote surveillance. Moreover, because of the development of artificial intelligence (AI)-powered algorithms to decipher this data, the output is far more comprehensible than it has ever been before.

As a result, governments, commercial operations, communities and other establishments with the goal of protection, safety and/or surveillance of people or assets, are rapidly deploying these cameras. This is the strongest driver of growth for the segment, according to independent market research.

India and China are rapidly building out their commercial infrastructure, which is expected to lead to a significant increase in the deployment of security systems.

The smart cities coming up across the world are also consuming a lot of electronic safety systems, which is driving demand in this fast-growing segment.

A big part of safety is keeping up with regulatory requirements and protocols for fire. Because of technological developments, these systems too are undergoing a huge change.

The pandemic was a big blow to the segment because of the slowdown in construction activity and the supply chain issues that followed. The inflation resulting from the government stimulus also increased raw material costs. The labor crunch that affected most of the economy also impacted this segment. Therefore, although not as badly as they were last year, companies in this industry are still seeing some of the effects in the limited supply of key components, rising input costs and labor tightness, although they are mostly compensating with price hikes even as they work to diversify their supply chains.

There has been one positive fallout of the pandemic, as well. Because of the need for social distancing and some governments controlling the movement of citizens through apps, there has been increased awareness about the loss of privacy in such cases. Therefore, a number of governments in the West have laid down certain privacy rules with which device suppliers have to comply. This, in turn, is increasing demand for more innovative solutions that are also in compliance with government mandates.

Other than commercial operations, there is an increase in public security system installations, as governments and administrative bodies also up the ante on security following the increased level of terrorism, vandalism, wars and violence around the world and in the schools and colleges in our backyard.

Market researcher Mordor Intelligence estimates that commercial security system demand will grow a robust 8.5% CAGR in the next six years to 2028, second only to the public security systems segment, which according to MarketsandMarkets will grow at a CAGR of 10.3%. As the outlook for residential and community construction is not as bright (in the U.S.), there will be lower uptake in this segment until this situation changes.

Speaking of which, the markets continue to look troubled following the banking stress, people continue to pull money out of the smaller regional banks and worried investors continue to liquidate their bank holdings. But for all of the reasons highlighted, the security and safety services industry looks like a relatively safe bet, as far as equities go.

Here are three stocks from the industry that I’ve picked because of their growth potential through these difficult times:

Napco Security Technologies, Inc. (NSSC - Free Report)

Amityville, New York-based Napco is focused on developing, manufacturing and selling electronic security products in the U.S. and internationally. The company offers access control systems, door-locking products, intrusion and fire alarm systems, and video surveillance systems for commercial, residential, institutional, industrial and governmental applications.

It also buys and resells various identification readers, video cameras, PC-based computers and peripheral equipment for access control and video surveillance systems, and markets peripheral and related equipment manufactured by other companies. The company markets and sells its products primarily to independent distributors, dealers and installers of security equipment.

Napco is managing continued supply chain issues by re-engineering products, developing alternatives, lowering cost and using more readily available supply sources and delivery methods while continuing to work closely with its customers and suppliers to see the whole thing through. While its strategy of temporarily sourcing higher-priced components for its radios is a pressure on profitability, the company is more than making up with the recurring revenue that these installed and operating radios generate.

Analysts expect the Zacks Rank #2 (Buy) stock to generate double-digit revenue and earnings growth in both its fiscal years 2023 and 2024 (ending in June). Revenue and earnings growth in the current year is expected to be 21.4% and 97.7%, respectively. Next year, there’s expected to be further growth of 15.0% and 37.7%, respectively. The 2023 estimate has increased 16.4% in the last 60 days, while the 2024 estimate has increased 5.4%.

Brady Corporation (BRC - Free Report)

Milwaukee, Wisconsin-based Brady Corp. manufactures and supplies identification solutions (IDS) and workplace safety (WPS) products to identify and protect premises, products and people in the US and internationally. The IDS segment serves industrial and electronic manufacturing, healthcare, chemical, oil, gas, automotive, aerospace, governments, mass transit, electrical contractors, education, leisure and entertainment, telecommunications, and other industries through distributors, a direct sales force and digital channels.

The WPS segment provides workplace safety, identification and compliance products, including signs, tags, labels, and markings; informational signage and markings of various kinds; facility safety and personal protection equipment; first-aid products; and labor law and other compliance posters for process, government, education, construction and utilities industries, as well as manufacturers through catalog and digital channels.

Brady has generated organic sales growth of at least 6% in each of the last eight quarters despite the macro concerns and currency headwinds it has been up against. Its success is largely related to its pipeline of innovative products, a number of which will launch in the second half of the year. It has also restructured the Workplace Safety segment to simplify the product offering, streamline the cost structure and improve its price competitiveness, which has helped it generate organic sales growth and increased segment profit.

Management expects that the reorganization of its operating segments into Americas & Asia and Europe & Australia will allow it to apply its best go-to-market strategies in key geographies, facilitate new product development in recent acquisitions and further simplify its global businesses. Management is very upbeat about the current level of demand and expects it to hold up.

Analysts apparently agree because they’ve taken both 2023 (ending July) and 2024 estimates up 15 cents in the last 30 days. Revenue estimates are not available, but these revisions to the earnings estimates represent 9.5% growth in 2023 followed by 1.5% growth in 2024.

Allegion plc (ALLE - Free Report)

Dublin, Ireland-based Allegion manufactures and sells mechanical and electronic security products worldwide for commercial, institutional and residential facilities, including educational, healthcare, governmental, hospitality, commercial office, and single and multi-family residential markets. Its main product lines are door controls, locking systems, and electronic security and access control systems.

It also provides related inspection, maintenance and repair services, as well as related software. Through a software as a service (SaaS) model, it offers access control, IoT integration and workforce management solutions.

Allegion continues to offset currency headwinds and inflation with strong price realization across products and channels as well as increased leverage from very strong non-residential volumes in the Americas. While the supply situation continues to improve, Allegion has resorted to engineering redesigns and alternate supply actions that are helping it normalize lead times in mechanical products. It has also added a 350,000 square foot manufacturing facility in Central Mexico to near-shore supply.

Analysts are very upbeat about its prospects. For 2023, their revenue estimates represent 9.7% growth while earnings estimates represent 11.8% growth. This is expected to be followed by another 3.0% revenue growth and 7.0% earnings growth in 2024. In the last 30 days, the 2023 estimate increased 3.9% while the 2024 estimate increased less thana percentage point.

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