ADT Inc.: Further Rebound Possible, But Inflation Could Be A Concern

Summary

• ADT Inc. has seen a recent rebound in growth.
• While the company has recently seen a return to positive earnings growth, inflation might dampen demand across the CSB segment in the short to medium term.
• I take the view that the upcoming earnings season will prove a key telling point as to whether the company can continue to rebound from here.

PhonlamaiPhoto/iStock via Getty Images

Investment Thesis: While ADT has seen a rebound of late, the next quarter will be a significant telling point as to whether the company can continue to bolster earnings in the face of inflation.

As the provider of security services to households as well as small and large businesses - ADT Inc. (NYSE:ADT) has recently started to see a modest rebound from the decline we have been seeing over the past year:

investing.com

The purpose of this article is to investigate whether we could see ADT make further gains from here - particularly in the context of the current economic climate.

Financial Performance

When looking at the company's quick ratio (calculated as cash plus accounts receivable all over current liabilities), we can see that the ratio has increased slightly - meaning that the company's ability to cover its short-term debt obligations at present is virtually similar to that of three years ago:

	June 2019	June 2022
Cash and cash equivalents	43	44
Accounts receivable	276	528
Current liabilities	1391	2365
Quick ratio	0.23	0.24

Click to enlarge

Source: Figures sourced from ADT Q2 2019 and Q2 2022 Earnings Releases. Quick ratio calculated by author.

With that being said, we can see that current liabilities still significantly outsize that of cash and accounts receivable. Thus, this could become a concern for investors if earnings growth does not translate into higher cash levels over the longer-term.

Additionally, when looking over a longer-term period, we can see that the company's EV to EBITDA ratio has been rising over the past five years - while EBITDA per share itself has been falling:

ycharts.com

In this regard, this could indicate that the stock is relatively overvalued compared to five years previously.

We can also see that ADT has only recently seen a rebound to positive territory in diluted earnings/net income per share:

Q2 2019

ADT: Second Quarter 2019 Results

Q2 2022

ADT: Second Quarter 2022 Results

Additionally, we can also see that the CSB (consumer and small business) segment has accounted for the majority of ADT's revenues - while that of the Commercial segment accounts for a small portion:

ADT: Second Quarter 2022 Results

Looking Forward

Going forward, inflation and the prospect of recession is likely to prove a significant concern for the economy as a whole.

For ADT specifically, the fact that consumers and small businesses account for the majority of the company's revenue means that the company could be at risk of seeing revenues falling if these customers show a lower propensity to spend in the face of rising prices.

For instance, consumers and small businesses might decide to postpone potential security upgrades to their houses or premises as a result of rising costs. Moreover, there is also the risk that potential revenue growth across the Commercial segment may not be sufficient to compensate for a drop in revenue across CSB.

With that being said, a major driver of recent growth in the stock was a $1.2 billion investment from State Farm - which is currently the largest home insurance provider in the United States. Such a deal is expected to allow ADT to broaden its potential customer base to current customers of State Farm by further bolstering sales of its security products to this segment.

While the stock saw an encouraging rebound on such news - the upcoming earnings quarter will be a significant telling point as to whether such a deal is expected to provide a significant revenue boost.

Additionally, while inflation might reduce the demand for security products in the short to medium-term, we could also see demand increase. With inflation resulting in rising property prices - it is also possible that homeowners and businesses may seek to invest in security as a way of mitigating against the potential for incurring higher property losses in the event of a catastrophe.

Conclusion

To conclude, ADT Inc. has seen a recent rebound after a period of declining growth. Inflation poses a potential risk to demand - but it could also provide an opportunity for longer-term growth by making security investment more appealing.

Ultimately, my view is that the next quarter will be a significant telling point as to whether ADT can sustain the rebound it has been seeing to date.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in this article.

Comments

[CPA022784]

Tender offer of $9 per share currently outstanding in connection with the State Farm purchase. Unclear why there is near a $1 arbitrage. Perhaps it is timing and will close as the tender offer expiration nears.

[Mo Money 2011]

@CPA022784 yes, I got this offer too--wondering if its too good to be true. May accept it for my few shares in a downtrending market; cash is king right now!