Napco Security Solutions ( Nasdaq - NSSC ) -- Next Generation Rolls Out

Napco Security Solutions (NSSC $3.25) reported Q4 (June) results that were slightly below our expectation.  The company is a leading provider of security systems used by homeowners and commercial customers.  Both segments remain depressed by the weak domestic economy.  A broad line of new Internet based products has been in development over the past two years.  Those units have started to hit the market.  The new technology promises to create a competitive advantage over the next decade.  Most of Napco's competitors scaled back R&D efforts during the recession, leaving the company with an open field with the high potential cloud based applications.

Earnings rose 22% to $.11 a share in the quarter.  That figure was helped by a lower tax rate, though, which resulted mainly from higher R&D tax credits.  Sales were a little below our estimate at $19.9 million.  The combination of new product contributions and an improving real estate climate promises to reestablish sales growth in fiscal 2013 (June).  We estimate sales will bounce up to $80 million (+13%), to provide a 76% increase in income ($.30 a share).  Napco operates with a fairly high level of fixed costs, so margins have the potential to expand meaningfully on higher volume.  The company also renegotiated its long term debt late in fiscal 2012.  That will result in lower interest expense, as well.

The long term out look is bright.  The technology platform Napco has created is likely to support a broad base of Internet based security systems.  That structure also should make it relatively easy and inexpensive for the company to add features and make other improvements as the industry evolves.  In 2-3 years sales could attain $100 million to provide earnings of $.50 a share or more.

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Ellie Mae ( Nasdaq - ELLI ) -- Mortgage Rates to Stay Low

Ellie Mae (ELLI $28.00) appears on track to produce excellent on target Q3 results.  Future performance is apt to remain robust, as well, following the Federal Reserve's decision to artificially reduce mortgage interest rates.  Approximately 65%-70% of Ellie Mae's business now is accounted for by refinancing.  If rates had been allowed to rise there was a possibility the company's unit volume might have slowed down as refinancing activity moderated.  Business continued to boom in the September period before the Federal Reserve got involved.  Ellie Mae continued to add new customers, and it continued to generate higher revenues from the ones it already had.  The company now generates 25%-30% of all the mortgages written America.  That percentage is likely to keep rising as Ellie Mae becomes the industry standard.  Average revenue per loan is likely to continue rising, as well.  Our estimates are unchanged.

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