Napco Security Technologies Stock: An Aggressive Micro-Cap IoT Play with Good Prospects

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BigGains for Napco Security Technologies With More to Come

We are seeing a concerted move by security technology companies to move into the rapidly expanding Internet of Things (IoT) segment. This makes sense, given that these companies have been involved in setting up residential and industrial security systems for decades.

With the acceleration in bandwidth speeds and IoT technologies that allow devices to communicate with each other, it has provided a bull case for companies such as Napco Security Technologies Inc (NASDAQ:NSSC) to jump-start their growth.

NSSC stock has a market cap of only $272.1 million, but the stock price doubled from its 52-week low of $7.40, reaching a high of $17.40 on July 5.

Napco Security Technologies’ core business revolves around security alarm systems, monitoring, and remote control, but the move into home automation is intriguing.

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Home automation is a hot area. With more household devices and appliances equipped with IoT technologies, clients are wanting to control their environment via their smartphones and other devices. Want a cooler house when you arrive? Use your device to do this. The applications are endless, which is why I’m bullish for investments like Napco Security Technologies stock.

Competition is a factor as more companies move into the IoT space, but my view is that Napco Security Technologies has already established a network of clients in residential, industrial, commercial, institutional, and government sectors, so it has a head start.

NSSC stock has broken above several key resistance levels, including the 50-day and 200-day moving averages, but it has since fallen back to its 50-day moving average.

Chart courtesy of StockCharts.com

If Napco Security Technologies stock can hold, it could set up for another move toward its July high and above $20.00.

My Bullish Case for NSSC Stock

Napco Security Technologies has been ratcheting its revenue higher in the last four fiscal years (ending June), and the positive trend is expected to continue.

The growth rate for the stock is not stellar, but it is consistent and could improve if the IoT segment continues to pick up.

Fiscal Year Revenue (Millions) Growth
2013 $71.4
2014 $74.4 4.2%
2015 $77.8 4.5%
2016 $82.5 6.1%
2017 $87.4 5.9%

For fiscal-year 2018, revenue is expected to grow by 4.9% to $91.6 million, followed by 7.4% growth to $98.4 million in fiscal-year 2019. (Source: “Napco Security Technologies, Inc. (NSSC),” Yahoo! Finance, last accessed August 15, 2018.)

Again, the rate of growth isn’t strong, but my optimism lies in the ability of Napco Security Technologies to convert existing and new clients to home automation.

In the meantime, Napco Security Technologies delivers growing positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fiscal Year EBITDA (Millions) Growth
2013 $5.8
2014 $6.1 5.0%
2015 $6.9 13.1%
2016 $7.7 13.0%
2017 $7.8 0.1%

The company is also delivering positive generally accepted accounting principles (GAAP) earnings. Excluding full-year 2017, GAAP earnings have been growing since 2013.

Fiscal Year GAAP Diluted Earnings Per Share
2013 $0.16
2014 $0.18
2015 $0.25
2016 $0.31
2017 $0.30

Napco Security Technologies is expected to increase its adjusted earnings to $0.42 per diluted share in fiscal-year 2018 (versus $0.30 per diluted share in fiscal-year 2017), followed by an increase to $0.54 per diluted share in fiscal-year 2019.

The company also has positive free cash flow (FCF), but it saw declines in three of the past four fiscal years. The expected higher earnings could translate into higher FCF.

Fiscal Year Free Cash Flow (Millions)
2013 $4.5
2014 $4.0
2015 $3.2
2016 $8.5
2017 $1.0

Analyst Take

The tailwinds in the IoT segment should provide some optimism for NSSC stock.

Napco Security Technologies has been buying back shares and insiders have been net buyers over the last six months, both of which are bullish signals.

If Napco Security Technologies can deliver better growth, I would expect the share price to vault higher.