Shares of the prominent security solutions provider, Napco Security Technologies, experienced a decline of approximately 18% over the past week, as of 4 p.m. ET on Thursday, based on data from S&P Global Market Intelligence. Despite slightly surpassing analysts’ predictions in its fourth-quarter earnings report last Friday, the market reacted unfavorably, driving Napco Security’s stock price downward.
Though this downturn might seem severe, it’s crucial to consider that the market had likely set high expectations for Napco, given that its stock had already increased by 95% over the past year.
Napco Security: Deservedly Valued for Excellence
Napco Security’s platform encompasses the “full security spectrum,” offering a comprehensive range of services in alarms and connectivity (including intrusion, cellular, and fire alarm systems), locking solutions (covering architectural, mechanical, and wireless locks), and access control (such as ID readers, control panels, and video). Napco stands out as the sole company within its peer group that covers all these areas, enabling it to serve as a one-stop solution for customers or complement existing systems.
Additionally, the company’s primary markets, including commercial, school, and residential sectors, are anticipated to grow by 8%, 11%, and 12%, respectively, by 2026. As traditional landline telephone services are gradually replaced with Napco’s wireless security communications, the company is poised to benefit as businesses upgrade from outdated security systems.
This transition to cellular-based and wireless communication is particularly significant for Napco, as it contributes to its valuable recurring service revenue (RSR). With RSR expanding at twice the pace of the company’s overall sales, it now constitutes approximately 40% of total revenue. Boasting 90% gross margins, this increasing RSR is expected to enhance the company’s profitability further.
Trading at 29 times forward earnings, Napco Security holds a premium valuation but presents itself as an attractive long-term investment due to its expanding RSR and comprehensive security offerings.
