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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