Value Line recently initiated coverage of The ADT Corporation (ADT) in its flagship product, The Value Line Investment Survey. The company provides electronic security and interactive home and business automation and related monitoring services in both the United States and Canada, with the U.S. accounting for 94% of 2012 total sales. It serves more than six million residential and small business customers, making it the largest firm of its kind in North America. ADT was founded in 1874 and is headquartered in Boca Raton, Florida. As of September 28, 2012, the company operates independently of Tyco International. It has about 16,000 employees.

The company’s primary business includes the installation and monitoring of security automation systems designed to detect intrusion, control access, and react to movement, smoke, carbon monoxide, flooding, temperature, and other hazards. It also addresses personal emergencies, including injuries and incapacitation. Once a triggering event occurs, the system connects to one of ADT’s monitoring centers. Depending on the type of service contract, these centers will then relay information to local fire or police departments and notify customers of the emergency.

The company’s key brands are ADT, ADT Pulse, and Companion Service. These are some of the most well-known brands in the electronic security industry. ADT Pulse allows customers to remotely monitor and manage their homes or businesses, including arming or disarming their security system, adjusting lighting or thermostat levels, or view real-time video from cameras covering their property. This can all be accomplished through any web-enabled device, including smart phones, laptops, and tablets.

Many customers purchase ADT products due to a perceived or actual increase in crime in one’s area, or other safety concerns. Its goods can give customers peace of mind. Security systems can also result in lower insurance premiums. A typical service agreement includes an installation fee and regular monthly payments for a contract that is typically three years in length. ADT markets its products primarily through national television and internet advertising. The sales force includes 3,900 consultants, with roughly 200 sales and service offices, as well as six monitoring facilities.

The business does face some seasonality, as more household moves occur during the second and third calendar quarters, so the disconnect rate is typically higher during those quarters. However, other factors, including lower marketing expenditures during those times, typically offset these effects.

ADT looks to generate new customers with attractive characteristics, including those with strong credit scores and high adoption of automatic payment methods. These qualities tend to lead to long average customer tenure. Most monitoring and home and business automation services are governed by multi-year contracts with automatic renewal provisions. As a result, recurring revenue generated roughly 90% of total sales for the year ended September 28, 2012.

The security systems market in North America is competitive and highly fragmented. There are a number of major firms along with thousands of smaller regional and local companies. This is due to low barriers to entry and the availability of wholesale monitoring, where smaller firms can outsource monitoring. Primary competitors include Protection One, Monitronics International, and Vivint.

Competition is mostly based on price and its relation to quality of service. ADT’s additional features and functionality have allowed it to differentiate its offerings and support a price premium. In the interactive services and home automation space, ADT faces increased competition from cable and telecommunication companies. Regarding the personal emergency response business, Phillips/Lifeline is its primary competitor.

We note that although ADT owns the rights to use its brand name in the United States and Canada, it does not own the brand outside of this region. As a result, in order to expand its business outside of North America, it would need to either acquire or license the ADT brand name from the current owner, Tyco. It could also develop a new brand outside of North America; however, this would likely be costly and could dilute the original brand. 

The company’s recent operating results have been favorable. ADT posted sales of over $3.2 billion in fiscal 2012, thanks to increased customers and higher average revenue per customer. The business itself has been fairly stable, and withstood the 2007-2009 recession fairly well. Ongoing price increases ought to boost top- and bottom-line results in the near term, but attrition rates may climb, as well. Management looks for longer-term recurring revenue growth of between 5% and 7%.

Subscribers interested in learning more about this security and monitoring company are advised to consult Value Line’s quarterly reports for ADT, as well as any supplemental reports and relevant articles that may arise as important news comes to light.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.