The public offering of ADT Inc (NYSE:ADT) has gotten off to a rocky start. For its debut, the company priced 105 million shares at $14 each, which was well below the $17-to-$19 range. Unfortunately, it looks like this move was not enough as ADT stock is off about 7% since its IPO.
Note that back in early February 2016, Apollo Global Management LLC (NYSE:APO) took ADT private in a $6.9 billion transaction. There were also mergers with other security providers like Protection 1 and ASG Security. So yes, by issuing ADT stock, APO has certainly pulled off a quick flip.
So what about the company itself? Is ADT stock worth a try? Let’s take a look at the background on the firm.
ADT, whose roots go back to 1874, is the most recognized brand in its industry. A survey indicates that it has about 95% awareness with consumers. This is certainly a big-time advantage as the market is highly competitive.
Keep in mind that ADT controls about 30% of the residential market in the U.S. and Canada. In all, there are 7.2 million residential and business customers.
And yes, the business model is standout. Consider that roughly 90% of the revenues are recurring and a typical contract has monthly payments, with terms of three to five years (often customers exceed the initial contract terms). The result is that the company generates substantial cash flows. For the 12 months ended September 30, 2017, the adjusted EBITDA came to $2.3 billion.
ADT certainly has a comprehensive product offering, covering burglaries, video surveillance, fire/smoke, access control and medical alerts. The company also has an extensive network, which includes over 200 customer sales and service offices and about 18,000 employees.
Something else: The core systems are seamlessly integrated with smartphones, tablets and laptops. ADT even works with Amazon.com, Inc.’s (NASDAQ:AMZN) Echo and Echo Dot platforms.
Also the company has been effective in leveraging its massive footprint. To this end, it sells third-party offerings from companies like Samsung, Life 360 and Cisco Systems, Inc. (NASDAQ:CSCO).
ADT Stock and the Risk Factors
There are definitely notable issues with ADT stock. First of all, the debt load is $10.6 billion (a large share of the amount raised from the IPO will be used to pay some of this down). This limits the company in investing in new systems. There could also be more pressure if interest rates continue to rise.
However, perhaps the biggest problem is the competitive environment. Just some of the fierce rivals include AlarmCom Hldg Inc (NASDAQ:ALRM), Johnson Controls, Vivint, STANLEY Security and Ring. But interestingly enough, telecom and cable companies have also been moving aggressively into the market. For example, Comcast Corporation (NASDAQ:CMCSA) and AT&T Inc. (NYSE:T) have substantial businesses.
In other words, it could get tougher for ADT to gin up growth. Or there could be more pressure on margins so as to win more business with lower pricing.
Bottom Line on ADT Stock
With equities in the bull phase, the IPO market should be roaring. But for the most part, investors continue to scrutinize deals.
So with ADT stock, the poor performance should be ominous. Whenever an offering breaks the offering price, it’s an indication that Wall Street has legitimate concerns.
In light of this, the best approach is probably to wait on ADT stock — such as by seeing how the next couple earnings reports go before thinking of a purchase.