NAPCO Security ratings downgrades to neutral by B. Riley and more analysts on credibility hit from restatement

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• Investment firm B. Riley downgrades NAPCO Security (NASDAQ:NSSC) to neutral from buy with a lowered price target from $38 to $24 after the high-tech electronic security equipment manufacturer said it would revise its financial statements over the first three quarters of its 2023 fiscal year.
• Stock has slumped 38% in early trading on Monday to $23.74.

• Furthermore, the company sees Q4 net sales at $44.7 million vs. the consensus of $48.07 million and net income at between $10.0 million and $11.0 million.

• The New York-based group said it had identified certain errors related to its calculation of the cost of goods sold and inventory. Specifically, Napco noted that its books did not appropriately account for the costs of several components that had "fluctuated substantially."

• Inventories were overstated and the cost of goods sold was understated, resulting in overstated gross profit, operating income, and net income for the first three quarters of fiscal 2023, NAPCO said.

• Looking ahead, the firm revises estimates for FY24E total revenues to go from $200M to $177M and adj. EBITDA from $53M to $43M. On lowered estimates, Napco trades at 7x FY24E revs and 31x FY24E EBITDA, a substantial premium to its comps at 3x revenues and 30x, the analyst Raj Sharma wrote in a note.

• "We are downgrading Napco to a neutral rating with its PT lowered from $38 to $24, based on the lowering of its FY24E growth rates due to an expected alarm sales and service sales slowdown. The $24 PT is based on 4.5x FY24E revenues and 18x EBITDA," he noted.

• Other downgrades include: Analyst at William Blair downgraded the stock rating to Market Perform from outperform and noted that, "the issue is easily explainable; however, given the fact that management sold shares during this period, we believe the optics are bad. As such, management’s credibility will likely take a hit, and we believe it will take several quarters for the company to regain investor confidence."

• Napco Security price target lowered to $30 from $39 at Needham.

• Napco Security downgraded to Hold from Buy at Lake Street.

• Napco Security price target lowered to $40 from $50 at Craig-Hallum.

• Seeking Alpha Quant Rating systems give a Hold while Wall Street analysts maintain a Strong Buy rating on the electronic security products company.

• More on NAPCO Security:

• Napco Security Technologies: IoT-Driven Connectivity Services And R&D Imply Undervaluation
• Does The New Napco Dividend Policy Make Sense?
• Napco Security down 33% after announcing financials restatement; Q4 revenue below estimates
• Seeking Alpha’s Quant Rating on NAPCO Security