Napco Security Technologies ( Nasdaq - NSSC ) -- Locks it Down

Napco Security Technologies (NSSC $7.00) is a leading provider of high tech security systems used in commercial and residential applications.  A new line aimed at university and K-12 schools is generating significant leverage.  Digital systems enabling homeowners to monitor and control their homes remotely with smartphones promises further momentum.  Napco's core commercial business has been improving over the past few years in response to improving real estate conditions.  Its traditional residential alarm business has recovered from the recession, as well.  Debt has been reduced, creating financial flexibility.  Margins are expanding as fixed costs are spread over increasing sales volume.

The digital home security market remains in an early stage of development.  Napco already has gone through several technology iterations to arrive at an engaging and cost-effective solution.  The company appears to have superior offerings at this point than ADT and Comcast, both of which are promoting the concept aggressively.  Napco supplies its products to independent security dealers who compete with the giants, representing about 50% of the potential market.  The company appears to have a clear lead versus other suppliers to that segment.  Activity is improving in response to greater promotional activity and somewhat better economic conditions.

Greater near term traction is being realized in the school market.  Napco has developed a series of products aimed at a variety of price points to protect schools against dangerous intruders.  High end systems aimed at universities enable fast and precise response throughout an entire campus.  Less expensive lockdown systems are available for stand alone schools.  The pipeline of orders has been building rapidly, although installations remain sporadic because schools typically prefer to wait until classes are done before they proceed.  Napco is working to create a more modular installation process that goes more quickly and creates less disruption, allowing it to work on jobs year around.

Margins are improving as sales volume expaNDS.  We estimate income will advance 125% in fiscal 2014 (June) to $.45 a share on 12% sales increase ($80 million).  A similar pattern is likely in the following fiscal year.  Faster sales growth is possible if the new home digital and campus security products pick up speed.  In 2-3 years earnings could reach $.90-$1.15 a share on sales of $110-$130 million.

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