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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Napco Security Technologies ( Nasdaq - NSSC ) -- College Lock Downs Lift Outlook

Napco Security (NSSC $4.25) reported good on target Q3 (March) results.  Performance was impacted by the after effects of Hurricane Sandy.  The company sells its home security line through independent dealers.  Many of those were preoccupied with other parts of their business, like replacing heating and air conditioning systems that were destroyed in the storm.  Several dealers merged during the quarter, as well.  That also interrupted order flow.  Napco's traditional door lock business gained momentum, though.  Part of that stemmed from internal management changes that were put into place last year.  A pick up in new construction activity provided further impetus.  Overall, sales were flat at $17.2 million.  Income dipped year to year to $.01 a share.

Napco landed a major order ($1.5 million) from a university for a campus wide lock down system.  The technology employs wireless communication, so it can deployed without tearing apart any walls.  A wide range of controls will be included, allowing officials to remotely lock down in seconds whatever doors are appropriate.  If necessary, the entire campus can be locked.  The potential for additional campus security business is strong.  Universities tend to be well financed.  Students and their parents are increasingly concerned with security.  And Napco's technology is designed for the task, unlike competing products that require substantial customization.  The company offers lower cost options for public schools, as well.  School security systems have the potential to become substantial profit contributors in fiscal 2014 (June) and beyond.

Napco's high potential digital home security line was launched in the current quarter (June).  Those systems allow residents to control, with a mobile device, their home's security systems, lighting, heating, and webcams.  Earlier in the year Napco introduced a wireless connection to the central monitoring station, eliminating the risk of thieves cutting the telephone line.  Those units have been particularly attractive to customers without land lines.

Fourth quarter (June) results promise to be solid.  The big college campus order should offset any continued weakness from last fall's hurricane.  (A large portion of Napco's business is in the affected area.)  Our estimates are unchanged for both fiscal 2013 and fiscal 2014.

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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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Napco Security Technologies ( Nasdaq - NSSC ) -- Digital Rollout Continues

Napco Security Technologies (NSSC $3.35) appears on track to produce solid Q2 (December) results.  The company is a leading provider of security systems for commercial (80%) and residential (20%) customers.  Based in the northeast, performance was impacted recently by Hurricane Sandy.  Product updates and greater marketing efforts have bolstered Napco's core performance.  Improving real estate activity is adding further impetus.  The introduction of a next generation Internet based technology promises to amplify results over the next several years.  Those products enable customers to control their systems remotely and perform a wider range of features.  The new line includes a recurring revenue component which promises to bolster margins.  The critical software included in the systems will need to be upgraded over time.  The recurring revenue ensures the technology improvements are delivered.  Adoption of the new wireless and Internet products is growing rapidly, albeit from a small base.  Broader acceptance is possible if the cable companies begin to market security products more aggressively.  Most have added them to their product lines but so far the selling effort has been muted.

Margins could expand materially down the line.  The recurring revenue should improve them directly.  Napco also is operating below capacity at present.  So higher sales will spread fixed costs over a broader base.  The tax rate is likely to remain at 20% due to offshore manufacturing.  In 2-3 years sales could achieve $100 million to produce income of $.75 a share.

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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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Napco Security Solutions ( Nasdaq - NSSC ) -- Solid Execution

Napco Security Solutions (NSSC $3.00) appears on track to report excellent on target Q4 (June) results.  The quarter normally is the company's strongest from a seasonal perspective.  Performance was amplified this year by lower borrowing costs, contributions from high potential new products, and better results at a division (Marks) that had been a drag on results since it was acquired in 2008.  Napco is a leading provider of security systems for residential and commercial use.  Marks was an established provider of door locks for the commercial market when Napco bought it out, right before the real estate industry collapsed.  That transaction was financed with debt.  Higher interest costs and declining sales created a double whammy which has been plaguing income ever since.  Napco has been repaying principal over the past four years.  A few months ago it also refinanced the loan to provide reduced interest payments.  The commercial real estate market has stabilized, moreover, laying the groundwork for improved lock sales in upcoming periods.

The high potential Internet based security systems are building momentum.  Napco invested heavily in R&D over the past several years to develop a family of innovative products.  Those include remote video monitoring, remote control (turn on the lights, the heat, the television, whatever you want, with your phone), wireless break-in reporting (notify the police somebody is breaking in even if they cut the phone line, or you don't even have a land line), and a variety of other next generation systems.  The company probably would not have made those moves, as logical as they were, if the C.E.O. didn't own more than 40% of the stock.  The fact it did, Napco now is set to capitalize from the shift to digital technology.

Economic headwinds continue to prevent Napco from realizing its full potential.  The base business, selling standard security systems to local dealers, is improving, though.  The digital products are gaining acceptance.  The Marks operation is turning the corner.  And the giant cable companies continue to examine security as a prospective new revenue source, part of a "quadruple play."  That hasn't happened yet.  It's possible Napco will have to drive the new digital technology to consumers itself.  Even if the industry takes that slower path Napco promises to deliver increasingly positive results in upcoming years.  If the cable companies step in, explosive gains could materialize.  Our estimates don't reflect the cable industry's potential, and are unchanged. 

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Napco Security Solutions ( Nasdaq - NSSC ) -- Solid Finish to the Year Likely

Napco security Solutions (NSSC $3.00) appears on track to produce solid Q4 (June) results.  The company is a leading provider of home and commercial security systems.  It sells its products to a wide range of local installation companies, including the majors.  Growth has been stymied by the economic downturn.  But Napco has been investing heavily in product development, updating its systems with more intelligent computerized controls, Internet connectivity, and wireless communication.  At this point Napco is promoting that next generation technology to its existing distribution network.  Volume is picking up but it remains a small part of the overall business. 

Most of the national cable and phone companies are exploring home security as an additional option for its triple play customer base.  Those efforts remain in the trial phase.  But substantial growth could result if those distribution channels develop.  Our estimates remain muted for the moment due to the economy and the uncertainty associated with the next generation line.  Once that technology builds momentum substantial stock price gains could develop.  In 2-3 years income could reach $1.00 a share.  Applying a P/E multiple of 15x suggests a target price of $15 a share, potential appreciation of 400% from the current quote.

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Napco Security Technologies ( Nasdaq - NSSC ) -- Economic Headwinds

Napco Security Technologies (NSSC $2.85) reported lower than expected Q3 (March) results.  Sales declined 3% to $17.2 million.  Earnings were unchanged year to year at $.03 a share.  Home security demand remained muted despite the introduction of several high tech products due to continued weakness in discretionary consumer spending.  That segment did post a 5% gain but a stronger performance was anticipated as a result of the new product launches.  Locking system sales to the commercial market remained slow and declined by approximately 20%.  Napco has developed a series of new locks aimed at the refurbishment segment, which promises to give that segment a lift in upcoming periods.  Up to now the company has relied almost completely on new construction.  That area has started to show improvement, which could yield further leverage in upcoming quarters.

The new computer based home security products are gaining popularity.  Additional features and upgrades are in the pipeline.  The technology is likely to dominate the industry over the long haul.  For now, though, most sales are being made to new installations.  Upgrade sales to existing customers have been relatively modest.  And even in the new user market sales have been less dynamic than they might have been under better economic conditions.  Still, volume is likely to expand.  And margins promise to widen on any increase in activity.

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Napco Security Systems ( Nasdaq - NSSC ) -- Computerizing Home Security

Napco Security Systems (NSSC $3.00) is a leading provider of home security products, which are re-sold by distributors and local installation companies.  The company has developed relationships with most of the industry's leading re-sellers.  In the past the company focused primarily on standard access control and alarm systems.  At the peak of the market in 2008 Napco purchased a leading lock manufacturer ("Marks"), which expanded its product line but saddled the company with debt obligations.  Napco was able to keep its head above water while sales nosedived during the recession, helped by a low cost manufacturing base in the Dominican Republic.  Well established relationships with major dealers like ADT enabled Napco to maintain pricing and market share, as well.  The Dominican operation also provides for a reduced tax rate.  Most of Napco's competitors retrenched during the downturn to conserve capital and wait for better days.  The company took the opposite approach.  Product development activities were accelerated.  Marketing programs were broadened.  The company now is launching a series of computer-based products that promise higher profit margins, broader customer adoption, and potential cross marketing opportunities.

A wireless communication device offers the greatest immediate potential.  In the past most home security systems sent alarms to police and other monitoring stations using conventional telephone lines.  A rising number of households don't have landlines any more.  Napco recently introduced a wireless transmitter to fill the void.  Those devices also make it impossible for thieves to cut the phone line before going in.  Napco's system costs significantly less than competitive wireless offerings, providing attractive margins for its re-sellers.  They also usually generate recurring revenue that is divided between Napco and the re-sellers.  Unit volume has been doubling every quarter since the product line was launched last fall.  A remote monitoring package holds equally large potential.  That software enables customers to control their house from a cell phone, performing tasks like turning the heat up and down, managing the lights, and watching what's happening through a series of webcams.  As more appliances become computerized that technology could become increasingly popular.  A television advertising campaign featuring NCIS's character Timothy Magee (the geek) is reinforcing consumer demand.

Commercial demand is advancing, too.  Napco integrated its fire and security systems into a single package to simplify installation and management.  It also upgraded the locking systems obtained in the 2008 Marks acquisition.  The expertise required of its commercial offerings is being transferred to Napco's consumer products in a systematic fashion, moreover, driving quality up and costs down.

Earnings are on the upswing.  We estimate non-GAAP income (which excludes acquired intangible amortization and stock option expense) will double in fiscal 2012 (June) to $.25 a share.  Next year $.40 a share represents a realistic target.  Margins promise to keep widening as volume climbs in subsequent periods.  We estimate income will approach $1.00 a share within 2-3 years on sales of $100 million.  Applying a P/E multiple of 15x to those earnings suggests a target price of $15 a share, potential appreciation of 400% from the current quote.

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