Morgan Stanley Upgrades ADT Following Q1 Results

• ADT Corp ADT shares have lost 24 percent since January 4, and are currently trading near their 52-week low of $24.44.
• Morgan Stanley’s Jiayan Zhou upgraded the rating for the company from Underweight to Equal-weight, while reducing the price target from $32 to $28.
• ADT’s current stock valuation reflects the headwinds from competitive threats, Zhou noted.

Analyst Jiayan Zhou mentioned that ADT’s shares declined 16 percent after the company reported its 1Q results. The disappointing features were the 30K net subscriber loss and lower-than-expected adjusted FCF of $45 million.

Zhou pointed out that ADT’s performance on the pricing front was good, with ARPU up 2.7 percent y/y in the latest quarter. The company’s 1Q core EBITDA margin of 50.8 percent was also in-line with expectations.

The company’s FCF is expected to improve on a y/y basis in the second half of 2016. The analyst wrote, “As such, while we modestly reduced our FY16e FCF by ~2%, this still represents ~4% Y/Y growth.” The wind-down of 2G conversion costs are also expected to result in a $70 million y/y benefit.

“With management further tightening its direct customer acquisition criteria (which contributed to 70bps reduction in churn during FY15), we also see the potential for attrition to step down to the sub-12% level as per guidance, particularly if the housing market (viz. existing home sales) starts to moderate,” the Morgan Stanley report noted.

The continued challenges from slow net subscriber growth is already reflected in ADT’s stock valuation, Zhou pointed out.