ADT Stock Drops 50% Since IPO

By John Honovich, Published May 17, 2018, 09:22am EDT

It has been a brutal 4 months for ADT.

They first expected to IPO at ~$18.

They IPOed at $14, dropping immediately to $12.39

And now, not even 4 months later, the stock is at just $7 per share. Big picture, they went from an expected market value of $14 billion down to just ~$5.4 billion now.

Vote / Poll

Is this a great buying opportunity or the beginning of the end for ADT?

RMR Impact Bad

Alarm monitoring companies like ADT have historically revealed in their financial power and sky-high valuations. No more for ADT. 

In 2016, the industry cheered the deal:

***** *** *********** ******, Apollo ***** ** ***** ADT **** *** **** security ******* ********** * in *deal ****** ** $** *******...

“****** *** **** **** with ******* ** *** value ** ** **** to ***. ** *** the $** *** ***** offerat ** ***** ***. Not bad for the industry’s largest player, particularly given ADT’s strong signs of improvement in most of their key performance indicators.” [Emphasis Added]

***, ***'* ********* *** gone **** $** ******* to $*.* ******* *** from ** ***** *** to ** ***** ***.

*** *******, **** ** ADT **** ****** ********* presentation ******* ***** $*** million ***:

*** ** *****'* $*.* billion *********, **** $*** ******* of *** ** ***** valued ** **** **.* times.

***, ** *** ****** argued, *** ************* ** improving, **** ******* *********, shorter ******* *** ********* earnings:

******* ****, *** ***** is ***** ********.

The *** ** *********** ***?

*** *******, **** *********, is **** *** ** essentially **-********* **** ****** on *** *******. **** may ** ****** *** ship ** **** ** possible *** ** ** going ****?

*******, ****** *** **** a ***** ****** ** the ***** *******, ********* ********* ******* **** **** *** rolling *** ***** *** security ******. *** **** ******** ******'* ******** offering, ** **, ** is * ****-*********, ** direct ****** ** ***. On *** ***** ****, Amazon *** **** * track ****** ** **********, the **** ****** ** Amazon ****** ***** ** incumbent's ******** *** ***** valuations ** ****.

***'* ******* *** ******* been ****** **** *** entrants *** **** **** complimentary *** ***-*********** ** their **** ****** ** more **** ** ** homeowners *** ***** *** monitoring ******** *** ******* services ** ******** (*.*., Pulse). *** ** **** end, *** *** ***************. 

*** ****** ** ****** severely ************ ** **** is * ****** **** the *** ** *** glory **** ** ******** RMR *** ****** ****.

Comments (24)

ADT is heading downhill and will continue to head downhill. There are more than a few alarm companies that aren't small but they're not going to grow because they want to stay off the radar. I know of a few small alarm companies putting on thousands of accounts a year. Some selling 45,000 accounts and more every year. These companies stay out of the news and under the radar for their own reasons. The days of real RMR is just getting started. 

Consumers are realizing those huge companies like ADT arent who they want to do business with.

"The days of real RMR is just getting started"  what exactly do you mean by this?  

ADT will be taken private again if the stock falls further. I can't predict the price of stocks but in this case I sense a bit of overshoot to the lowside over concerns about Amazon. I suspect the threat is overstated a bit.

Try to sell professional cameras in residential today. Good luck I won't even quote it anymore the consumer will try DIY first. Small commercial is much the same. 

Alarms for RESI has to do much more or that market will turn to DIY more than it already has. 

In Kansas City monitoring by professional dealers are being advertised at $19.95 a month. 

How much of this is an RMR problem, and how much of this is an ADT problem?

ADT has a notably bad public image, with a reputation for selling a barely functional product, providing poor service, and using locking customers into long, predatory contracts with unjustifiably high prices. 

They've got a 13.7% attrition rate. 13.7%! If I ran an alarm company with more than a 6% attrit rate, I'd lock my doors, turn off the lights, and see if 7-11 needs a shift manager. 

They've got a 13.7% attrition rate. 13.7%! If I ran an alarm company with more than a 6% attrit rate, I'd lock my doors, turn off the lights, and see if 7-11 needs a shift manager.

In fairness, that is down from a 15.9% rate...

I do wonder, at that scale, if attrition is an inherently larger / harder problem (though I don't know enough about alarm business attrition to have a good sense on this generally).

I see their graphic designer graduated Dishonest And Misleading Chart Making School with high honors, which lines up precisely with the rest of ADT's public image (and, according to the stories, their actual business practices). 

Attrition is inherently a larger / harder problem when you treat your customers like money trees to be shaken as hard as possible and abandoned as soon as a the leaves have fallen off. 

In all seriousness, though: yes, attrition is obviously harder at that scale, but double digit attrition is still utterly unacceptable. Attrition that high is indicative of a sick alarm company. 

Simplisafe didn't kill ADT any more than Uber killed yellow cabs or streaming killed broadcast TV. Customers wouldn't have sought out an alternative if they hadn't been subject to poor business practices from the easier-to-use incumbent for many years first. 

My attrition is running around 4 percent but I don't do mass market type customers.

The other major problem they have, which all older alarm companies have, is legacy systems. The customers usually don't want to pay for upgrades after paying for ten plus years and then cancel when Systems start having problems.Holmes Protection in NY had huge issues with this. 

I think Pro One sold for 15 times back around 2010. But it was a real mess in those days. 

The experienced ADT management learned long ago that attrition can be controlled simply by changing the definition… now, “Gross Customer Revenue Attrition”.   Daaa, lower attrition by manipulating the rate increases.

Source: Lee Jones; Support Services Group

by changing the definition

Can you expand on that? Here is ADT's explanation / justification:

I have participated in much alarm industry M&A due diligence. After many decades, “attrition” still has not been standardized. Both buyer and seller beware. It remains the focus of much dispute after the closing date. When comparing non-standard portfolios, we like to ask for a very simple count of customer sites at beginning year, less customer sites removed during following 12 months.   When that number in determined you can also get a more accurate attrition of revenue. Formulas based on “revenue attrition” can be manipulated to meet just about any number. It would be interesting to see the ADT attrition recast with above simple formula.

Source: Lee Jones; Support Services Group

Focusing on taking-over ADT accounts might be a profitable business :-)

John, what’s your sense of how this effects the private sales going on now being that ADT is now valued at 16.3 times current RMR?  

Does it give buyers leverage to pay lower multiples?

My bet is it will drive down the multiples of buying companies and accounts. The good ole days of 30 to 50 times are almost over 

Thanks Tracy.  What’s your opinion on how this will effect dealer programs like Brinks, Guardian, CSG, ACA, etc?

Once the word gets around and the people who fund these programs start cutting back the high valuations are over.  The financial models don't work as account attrition will increase even more. 

The ADT dealer program help them and they hurt as well. ADT has no relationship with those customers and the dealers slam stuff in as fast as they can with no regards to quality. 

ADT has a good management team and I know Tim pretty well, but they have their hands full. I bet it wasn't his idea to go public when they did. If it can get on the right track he is the guy who can do it. 

As usual, it is not what you say in IPO documents, it is what you do not say. Several other prominent law firms can be added to the list of ADT class-action litigation, for IPO non-disclosure.

This is not unusual, there are around a hundred law firms in America that specialize in suing public companies who's stock drops a lot. Been on the receiving end of one of these, insurance will pay and it will go away. 

I bet if you look closely the main plantiff owns one share of ADT stock. 

As my corporate attorney always said " there is no justice there is just us "

This IPO litigation could be more threating. Let’s think about the critical core component of the “alarm security industry”, like of ADT, … police response to their calls for help. Apollo/ADT forgot to mention in the offering docs the changes in status of this public/private partnership. Silence is suggestive …. something to hide? Maybe too hard to explain to customers and investors that security providers, like ADT, has lost credibility with law enforcement, nationwide, and most deterrent property alarms are treated like nuisance alarms, slow or no response. Even forgot to mention the statewide legislation, including TX,GA,FL, that has already banned monitoring firms from calling cops first.. Majority of the ADT customers have monitored deterrent systems …. a source of heavy attrition. Maybe Investors and the analysts already know the backstory, which is why ADT shares have dived 50%, to single digits, since the IPO (bottomed at $7). Note: Monitronics/Moni has slide from $88 several years ago to $2.28 this week.  Source: Lee Jones; Support Services Group; LeeSSG@att.net

Here is a bull case for ADT: ADT: There's Hope Yet, which argues that a low stock price, improvements in reducing churn and an expanding commercial business means ADT is a good stock buy at this time.

John... Note the "Comments" posted to that article...  A strong "bear" case for ADT…  not yet found the bottom at $7.

SSI re-ran the Stockhouse "There's Hope Yet" article.

Pro tip, when your proponents are saying "There's hope yet", that's not good.

 

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