Monday, February 11, 2013

Napco Security Technologies ( Nasdaq - NSSC ) -- Weather or Not

Napco Security Technologies (NSSC $3.40) reported Q2 (Dec.) results that were below potential.  The company is a leading provider of security systems for commercial and residential customers.  Most sales are made through dealer networks in the Northeast.  Napco had been suffering from the poor housing and construction markets for the last several years.  Momentum began to pick up in 2012.  But Hurricane Sandy interrupted that progress.  Several of Napco's largest distributors provide a range of services, in addition to security systems.  The damage forced them to work on more immediate problems, like heating.  That diversion of resources is likely to continue impacting Napco's results over the next few quarters.  The delay ultimately may prove to be a positive development for Napco, though.  A transformational change to digital technology is underway in the security systems industry.  The company has a diverse product line on the launching pad already.  But this will be a software driven business.  Improvements likely will be made over the next quarter or two, laying the groundwork for a major acceleration in fiscal 2014 (June).

Television advertising by competitors ADT and Comcast is taking off.  Napco serves the independent dealer market, which competes with the giants.  Independent dealers currently serve approximately 70% of the security system market.  Penetration is especially robust in the commercial building segment.  Dealers also do well with residential customers who want a specialized system.  The giants probably will capture a larger percentage of the market as the cable companies bundle security with their other offerings, to make it a "Quadruple Play."  That will just expand the market, though.  Napco is well positioned to win a sizable portion of the dealer segment as digital security goes mainstream.

We have lowered our fiscal 2013 (June) estimates due to the hurricane's impact.  But we think business will return to normal before long.  An eye popping increase in sales and earnings could develop over the coming 2-3 years. 

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