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M C I NTIRE I NVESTMENT I NSTITUTE A T THE U NIVERSITY OF V IRGINIA (NYSE : ADT - Long) Prepared by K. Wey and J. Wulkan, Memo by H. Freund| Jan. 23, 2013.

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Presentation on theme: "M C I NTIRE I NVESTMENT I NSTITUTE A T THE U NIVERSITY OF V IRGINIA (NYSE : ADT - Long) Prepared by K. Wey and J. Wulkan, Memo by H. Freund| Jan. 23, 2013."— Presentation transcript:

1 M C I NTIRE I NVESTMENT I NSTITUTE A T THE U NIVERSITY OF V IRGINIA (NYSE : ADT - Long) Prepared by K. Wey and J. Wulkan, Memo by H. Freund| Jan. 23, 2013 McIntire Investment Institute 1

2 I NVESTMENT T HESIS Market Leader: 28% Market Share, Durable Brand, Premium Pricing ADT Pulse Integrated Security: Higher ARPU, Lower Churn, Undervalued McIntire Investment Institute 2 Substantial Tailwinds: Insurance Discounts, Pre-wiring, False-alarm Reduction Multiple Opportunities to Win: Share Repurchases, Acquisition Target

3 F INANCIAL O VERVIEW Price: $47.98Avg Vol (3m): 1.90MOperating Margin: 23.14% Market Cap: $11.15BP/E (ttm):28.74EV/EBITDA: Range: $ Current Ratio: 0.77Debt/Equity: 0.80 McIntire Investment Institute 3 Entry point

4 ADT IS A M ARKET L EADER – 28% S HARE 4 McIntire Investment Institute Market Share Breakdown shows ADT dominates

5 ADT ABLE TO C ONSOLIDATE THE MARKET 5 McIntire Investment Institute GROWTH AT EXPENSE OF MOM & POP DEALERS Price raises are “great…[ADT raises] rates and a few people leave for the lower cost providers, as those smaller players grow larger, ADT buys them; everything in this industry leads to ADT" Price raises are “great…[ADT raises] rates and a few people leave for the lower cost providers, as those smaller players grow larger, ADT buys them; everything in this industry leads to ADT" ADT can “get parts for $200. The same parts cost me $750-$1200. Hard to compete….totally depressing small guys” ADT’s brand and legacy are significant competitive advantages, creating “a phenomenal need, without ADT people wouldn’t buy home security” Brand image is reinforced by “advertising…helped make ADT a household name” (VAR) and expands the “addressable market significantly…[as customers] see it in the mainstream”

6 I NTEGRATED S ECURITY – ADT HAS FINGER ON THE P ULSE McIntire Investment Institute 6

7 I NTEGRATED S ECURITY GROWING AT 23% CAGR McIntire Investment Institute 7 Benefits: 1) Lower attrition rate 2) Higher ARPU 3) ADT leader

8 P ULSE ADOPTION RATES SET TO I NCREASE McIntire Investment Institute 8 STREET UNDERESTIMATES PULSE ADOPTION BY 40% VAR: I NCREASE IN # OF C USTOMERS OPTING FOR P ULSE ( VS. S TREET – C ONSTANT )

9 T AILWINDS TO H OME S ECURITY A DOPTION McIntire Investment Institute 9 Insurance discounts Pre-Wiring False-Alarm Reductions Price Poor Service

10 F AVORABLE V ALUATION WITH M ULTIPLE W AYS TO W IN McIntire Investment Institute 10

11 C ABLE OR TELCO BUYOUT YIELDS EVEN H IGHER U PSIDE McIntire Investment Institute 11

12 B UYBACK PROVIDES 3 RD WAY TO WIN McIntire Investment Institute 12

13 L-ADT = S UBSTANTIAL R ETURNS FOR MII McIntire Investment Institute 13 Pulse propels ADT to higher price, MII to higher profits Price Target: $61 Upside: 27% Higher Pulse penetration forms solid base-case ADT continues to serve as home security market leader Home security tailwinds push ADT to profitability Share repurchases or ADT acquisition yield highest upside potential Four Ways to Win with ADT


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