Key Takeaways
- Napco shares fell 17% today after equipment revenue dropped 7.3% as two locking distributors bought less.
- Recurring service revenue hit a record and is now over half of sales, so the drop looks overdone.
- Allegion’s strong lock sales suggest the problem sits with Napco’s two distributors, and Alarm.com reports later this week.
- Free cash flow fell 80% and needs to recover.
Napco Security Technologies (NSSC) sank 17% today after fiscal first-quarter revenue rose just 1.7% to $50.0 million, short of Wall Street’s estimates.
CEO Kevin Buchel blamed “two locking distributors.” But Allegion (ALLE), which sells commercial locks through similar distributors, just had a strong quarter, and Alarm.com (ALRM), which also sells hardware alongside its subscriptions, reports later this week.
What exactly happened
Napco reported before the open:
- Recurring service revenue rose 11.5% to a record $26.1 million, at gross margins above 90%
- Equipment revenue fell 7.3% to $23.9 million
Buchel added in the release that “sell-through at both distributors grew year-over-year and strengthened meaningfully on a sequential basis.”
I suspect they’re working down inventory, and with sell-through growing, they’ll have to restock.
Locks are selling just fine elsewhere
In the same three months, to Sept. 30, Allegion’s Americas non-residential business grew by low double digits organically, and it raised its full-year organic growth outlook to 5% to 6%. That’s no slowdown in commercial locks.
In the second quarter, Alarm.com’s SaaS and license revenue grew 11.1%, and its hardware and other revenue rose about 5%. If its hardware holds up again, that’s one more sign Napco’s problem sits on two customers’ shelves.
TIKR tracks 6 analysts on Napco Security Technologies. How many say “Buy”?
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Most of Napco is a subscription business now
Recurring service revenue made up 52% of sales, and Napco puts its run rate at about $106 million. Analysts expected $1.64 a share this fiscal year, barely above last year’s $1.60:
I don’t expect much of a cut to that $1.64 after this quarter.
At the last close, Napco’s forward P/E was already well below its five-year average of 31x:
At today’s price, it’s about 20x, not far above its five-year low of 17x.
Cash is the catch
For two years, free cash flow ran between $11 million and $17 million a quarter:
In the quarter just reported, it fell to $2.3 million.
The selloff looks overdone
The market is treating two distributors’ cutbacks like a demand problem. At about 20x earnings, I think that’s an opportunity.
Of course, equipment revenue needs to recover next quarter, and cash flow has to come back with it.
So what is Napco stock actually worth?
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