ADT Stock Analysis – 2015 Annual Update $ADT

200px-ADT_Security_Services_Logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – May 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is an ADT stock analysis showing a specific look at how ADT Corporation (ADT) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The ADT Corporation (ADT) is a provider of monitored security, interactive home and business automation and related monitoring services in the United States and Canada. The Company’s products and services include home and business solutions and home health services. The Company’s brands include ADT and ADT Pulse. The Company’s electronic security and home or business automation offerings involve the installation and monitoring of residential and small business security and premises automation systems designed to detect intrusion, control access and react to movement, smoke, carbon monoxide, flooding, temperature and other environmental conditions and hazards, as well as to address personal emergencies, such as injuries, medical emergencies or incapacitation. The Company offers a range of alternate and back-up alarm transmission methods including cellular, digital radio and broadband Internet.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $36.68
MG Value $68.66
MG Opinion Undervalued
Value Based on 3% Growth $29.93
Value Based on 0% Growth $17.54
Market Implied Growth Rate 4.64%
Net Current Asset Value (NCAV) -$41.96
PEmg 17.77
Current Ratio 0.62
PB Ratio 2.10

Balance Sheet – March 2015

Current Assets $412,000,000
Current Liabilities $669,000,000
Total Debt $5,264,000,000
Total Assets $10,637,000,000
Intangible Assets $6,725,000,000
Total Liabilities $7,629,000,000
Outstanding Shares 172,000,000

Earnings Per Share

2015 (estimate) $2.75
2014 $1.66
2013 $1.88
2012 $1.67
2011 $1.59
2010 $1.01
2009 $1.03
2008 $0.94

Earnings Per Share – ModernGraham

2015 (estimate) $2.06
2014 $1.67
2013 $1.59
2012 $1.38
2011 $1.13
2010 $0.80

Dividend History


As this ADT stock analysis shows, the company is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, and the short history as a stand-alone company.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.13 in 2011 to an estimated $2.06 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.64% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on ADT Corporation (ADT)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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