Sell-Side: ADT A Secure Investment

Despite shares of ADT Inc ADT trading at a discount to the offer price of $14, sell-side analysts are optimistic about the security company's prospects. Most sell-side firms, including Goldman Sachs, Morgan Stanley and Imperial Capital, initiated coverage of ADT with the highest possible ratings. 

The Analysts

  • Bank of America Merrill Lynch analyst David Ridley-Lane initiated coverage of ADT with a Buy rating and $16 price target.
  • Credit Suisse analyst Anjaneya Singh started ADT with a Neutral and $14 price target.
  • Citigroup analyst Peter Christiansen initiated the shares with a Buy rating and $16 price target.

BofA: ADT Trades At 'Sizable' Valuation Gap 

Retention is the biggest free cash flow lever for ADT, with the company having lowered attrition by 250 basis points since its May 2016 leveraged buyout offer, BofA's Ridley-Lane said in a Tuesday note. 

The analyst estimates a 50-basis-point reduction per year. Other FCF levers include a reduction in per-subscriber acquisition costs, the addition of more commercial clients, operating efficiencies and deleveraging, Ridley-Lane said. 

BofA Merrill noted that ADT shares trade at a sizable valuation gap versus peers.

"We expect ADT to trade closer to peers as it delevers, reaccelerates growth and gains market share in commercial," the analyst said.

Key risks for ADT include increased competition and higher dealer concentration, according to BofA. 

Credit Suisse: Market Share Gains In Question

The visibility and resilience of ADT's business model is appreciable, Credit Suisse's Singh said in a note. About 90 percent of revenue is in contracts ranging from three to five years in length, lending significant visibility.

Attrition is comparable to other residential services and will improve under new management, the analyst said. 

Credit Suisse is wary of a less optimistic outlook for growth acceleration, given slow-moving industry penetration rates and the potential threat of new entrants.

"However, we still have some skepticism around how much of the low-hanging fruit has been picked and when ADT may be able to start gaining market share," Singh said. 

Citi: ADT's Business Model Underappreciated 

ADT's operational turnaround and business-to-many, or BTM, model is underappreciated, said Citi's Christiansen. The analyst said he expects the company's shift in focus to higher-return revenue sources — coupled with continuing efficiency gains and opening of less capital-intense product channels such as DIY — to lead to an achievable mid-40s levered and mid-teens unlevered FCF CAGR over the next three years.

Over time, Citi expects investors to better appreciate ADT's strong upside leverage from continued turnaround execution and sustainable increases in return on capital.

The Price Action

Since listing at $12.65 and closing at $12.39 on their Jan. 19, ADT shares have added about 2 percent.

ADT shares were down 4.22 percent at $12.15 at the close Tuesday.

Related Links:

Dell Reportedly Exploring Reverse Merger With VMWare, Potential IPO

The Week Ahead: IPOs Ramp Up Just As Earnings Season Fades

Photo courtesy of ADT.

Posted In: Anjaneya SinghBank of America Merrill LynchCitigroupCredit SuisseDavid Ridley-LanePeter ChristiansenAnalyst ColorPrice TargetInitiationAnalyst Ratings

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.