Will Commercial Customers Drive Growth for ADT?

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ADT's (NYSE: ADT) introduction to the public markets has some investors punching in the emergency code on their alarm systems.

While shares have lost nearly a third of their value since the January IPO, the company still has the potential to reward patient shareholders. To learn about the growth opportunities management wants to capitalize on, check out the video below.

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A transcript follows the video.

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This video was recorded on April 3, 2018.

Vincent Shen: The company also mentions that they have a real focus right now on optimizing, for example, their customer service and offering a really good experience for customers and hoping that will be a differentiator that will set them apart from some of these competitive threats, in terms of the do-it-yourself side of the business. And I do agree with the overall premise, the idea that the DIY market will help increase the entire pool of customers and potentially lift the overall industry. And obviously ADT will have to adapt and find ways, in terms of collaborations and partnerships, to get into that.

The other part, the side of the business that I think actually sees a little bit more concrete strength is on the commercial side, that looks a lot brighter to me. That was a big part of the Protection One integration. The big thing here is, large commercial customers usually offer lower attrition rates, a shorter payback period for the company to break even. I think this explains why a lot of the acquisitions that they've made in 2017 and 2018 so far are these bolt-on, tuck-in acquisitions that are intended to support that commercial side of the business and the opportunity that it presents.

We have a couple of more minutes here. Any final thoughts from you, Asit, in terms of people who might be looking at this company, considering the downward slide in terms of the stock price and things like that, what they should be focused on?

Asit Sharma: The good news is that the company's enterprise value to EBITDA, which we talk a lot about on this show, enterprise value being your stock market capitalization plus your debt divided by your earnings before interest, taxes, depreciation and amortization, that number is around 7x. Sox not a bad or pricey stock. That's the flip side of the steep descent since its IPO. Be cautious, investors! I would watch that balance sheet over the next couple of quarters.

My last thought is, I want to expand a little bit on something Vince mentioned. That commercial side does have some promise for this company. One of the reasons is that, the bigger the commercial enterprise, the more likely they're going to want to put the equipment on their own books. Why that's important is because when ADT sells a system to me, it sells it in such a way that it will own the equipment. It's forced to capitalize all those costs over a two to three year period that corresponds with the period Vince was mentioning when the equipment is paid off. So basically, the company can't expense that equipment all at once. Remember, it's not a manufacturer. It doesn't actually own it yet. And these are all transactions that occur over the balance sheet. But as it goes more into commercial business, it will have a higher expense on that equipment, or companies that it's selling to will own the equipment, so it'll have an even higher margin just selling its recurring monitoring services. And that could be powerful, if the company can continue to acquire smaller concerns that play in this commercial market. I do think that's a bright spot to keep your eye on over the next few quarters as you watch this. We always advise with new IPOs, you don't have to jump in on day two. You can watch these for three to four quarters, and then decide if you want to take a position or not.

Shen: Yeah. And even if you see a lot of potential in this company and the industry overall, beyond the concerns that we always have in terms of jumping into a recent IPO, definitely don't look at the recent slide as just an opportunity, a bargain, time to jump in. There's always the potential, of course, for it to go even lower.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.