NAPCO Security Technologies, Inc. (NSSC) | Daily Alert April 17
NAPCO Security is one of the world’s leading solutions providers and manufacturers of high technology electronic security, including door locking systems, access control, home alarm/detection systems to detect intrusion, fire, temperature, or glass breakage, and IoT connected home products.
With its share price cut to $16 back on 3/12, NAPCO announced that it would resume its 500,000 share repurchase plan which has 435,000 shares still to be purchased. The company made its case: “We believe that in light of the prospects that NAPCO has in front of us with the new products recently launched such as the iSecure, Firelink and the expectation of new locking and access control products with recurring revenue in the late summer or fall of 2020, these could lead to continued growth for us. Our recurring revenue from the existing Starlink line of communicators grew 45% year over year in fiscal 2019. As of our fiscal Q2 2020 [ended 12/31] the annualized run rate for [high margined] recurring revenue is now $24 million based on the month of December 2019.
“We also believe that the outlook for school security is strong and should add to our growth in the future as well as being driven by all of the funding legislation that many states have passed over the last year. The total of all the state funding legislation that has been passed is approximately $1 billion dollars. The Federal government has also allocated $100 million dollars per year for the next ten years for school security. Based on these prospects and other factors the company has determined that repurchasing shares at the current levels will be an attractive use of our capital. We are focused on creating shareholder value and with our senior management holding approximately 38% of the shares, our interests are aligned with our shareholders. NAPCO will continue its outreach program to raise awareness of the bright future we believe is ahead.”
NAPCO did not mention COVID-19 in this 3/12 press release, though it would certainly be a great time to install its door locking systems in schools while they are all closed. I imagine business has since slowed as the country goes into lockdown. Here too, I think the best way to look at this is one year out. 2020 is likely somewhat of a bust. Forget about it and assume NAPCO can hit this year’s EPS target of $.84, next year (when analysts otherwise had been foreseeing $1.20).
And, given NAPCO’s growth record I think there is good value here taking the longer term view. That seems to be out of fashion on Wall Street, for now. I don’t know where the stock will bottom, or when, but the stock market usually is looking 6 months out, so we may be about there. I believe this no-debt company will survive just fine.
As I’ve been typing this, the market has opened and NAPCO’s shares are up another 9% today as of 10:30 AM, now at $16.45). The company announced preliminary results for the recent quarter, its fiscal Q3. Despite everything, revenues advanced 4% to $26.2 million and recurring service revenues (primarily alarm monitoring) have now risen to an annualized rate of $25.4.
NAPCO notes that, “results would have been even higher were it not for supply chain interruptions (since remedied) caused by the initial shock of this unprecedented crisis.” The company gave no guidance for what is likely to be a challenging fiscal Q4 (nobody knows) except to say it is doing everything it can to stay safe and to focus on growing future sales and earnings, even if not temporarily in its fiscal Q4, then thereafter. And, of course, recurring revenue should be unaffected.
The company also pointed out, as I did, that it has zero debt. It also has $10 million of cash and $11 million on its revolver. As to having risen 20% in a little over a day to $16.45, the stock has been to (over) $30 in better times on its growth prospects, so while the higher PE’s awarded earlier will likely not return soon, there remains plenty of upside.
Tom Bishop, BI Research, www.biresearch.com, April 6 & 7, 2020
Fanuc Corporation (FANUY) | Daily Alert April 28
While you have seen a multitude of stories about the rise of robots in manufacturing as well as everyday life, you may not be aware of Fanuc, a Japanese blue chip with zero debt, a sterling reputation, and a storied past. Headquartered in the shadow of Mount Fuji, Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the brains of industrial robots. Fanuc claims to be the only company that uses robots to make robots.
Fanuc, whose name is an acronym for Fuji Automatic Numerical Control, has been a world leader in robotics since the early 1970s. It was founded as a wholly owned subsidiary of Fujitsu in 1955 after that electronics giant decided to enter the factory automation business. Today, Fanuc is as global as it gets with over 240 joint ventures and offices in over 46 countries and a commanding 65% share of its world market. For example, industrial robot manufacturer Shanghai-Fanuc Robotics Co. Ltd. has a plant in Shanghai’s Baoshan district.
Fanuc should benefit from robust demand from developed markets as well as China as its manufacturing costs continue to increase and manufacturers look to robots to increase productivity. You can find Fanuc robots at Amazon warehouses as well as the shop floor of General Motors.
The question of whether robots will replace manufacturing workers is a common one at cocktail parties these days (well, maybe not these days, but back when cocktail parties were allowed before this global pandemic hit). But it shouldn’t be a question. The fact is, they already are. The use of industrial robots has allowed companies like Panasonic to run factories that produce 2 million plasma television sets a month with just 25 people.
Much of the company’s sales are channeled through GE Fanuc, a 50-50 automated machinery joint venture with General Electric Company. Fanuc does most of its manufacturing in Japan, and is building a new factory near Tokyo to double its domestic output capacity of machine tools to produce parts of smartphones.
I have been following Fanuc’s stock for some time, but it always seemed expensive. With the pullback in the market however, we now have a great entry point as the stock is trading just over 13, the lowest point in a decade, and well off its 52-week high of 19.Fanuc offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive, and Fanuc also bought back 72 million shares last month. In short, Fanuc is a high-quality play on what seems to be an unstoppable trend.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, April 20, 2020
Twitter, Inc. (TWTR) | Daily Alert April 30
Twitter is an American microblogging and social media company whose platform allows users to post and interact with short written messages known as “tweets.” It has grown to play a vital role in journalism, politics, finance and many other fields, and is one of the 10 most-visited websites on the internet.
The company was founded in 2006 and is based in San Francisco, California. It has over 320 million monthly active users.
In late-March Twitter withdrew its Q1 guidance, saying that the economic slowdown caused by the COVID-19 pandemic is already hitting its advertising revenues. The firm now expects a Q1 operating loss.
In early April, the firm completed a large purge of accounts alleged to be unregistered promoters of certain countries’ governments—a violation of Twitter’s policies. Later in the month, founder Jack Dorsey pledged $1 billion of his stake in Square Inc., a payment processor he co-founded, to provide relief to victims of the COVID-19 pandemic.
We rate Twitter a “Buy” under $35. The risk level is “Medium.”
Jason Stutman, Technology & Opportunity, www.angelpub.com, 877-303-4529, April 2020
Zscaler, Inc. (ZS) | Daily Alert April 23
Businesses are accelerating their digital aspirations and work will never be the same. Gartner Inc. surveyed business leaders and found a majority of respondents were looking to make work from home a permanent part of their business model. Securing all those new connections is a big opportunity for investors.
But the opportunity for investors isn’t in the transition to telecommuting; it’s in security. Enter Zscaler. Zscaler builds walls around data, not applications. The San Jose, California, company makes cloud-based, next-generation firewalls. With millions of remote employees connecting to enterprise servers via unsophisticated home Wi-Fi, focusing on the data is clearly the way to go. In fact, it may be the only feasible solution in the new normal.
Zscaler’s Internet Access (IA) platform processes 35 billion requests with 125,000 unique security updates every day. Every endpoint, from powerful workstations and laptops, to smartphones and tiny Internet of Things devices, gets the same level of security. When a threat is identified anywhere, it gets blocked on the ZIA cloud platform everywhere.
That kind of versatility appeals to corporate customers. Consequently, Zscaler has grown quickly, attracting a stable of high-profile clients. Sales have been compounding in the 50% annual growth rate for years thanks to clients like Facebook (FB) and Google. Revenues jumped from only $53 million in 2015 to $302 million through 2019.
Long-term growth investors should enter new positions into a decline. In the meantime, get ready for innovative companies like Zscaler to start revolutionizing our new world.
Jon Markman, Pivotal Point, email@example.com, 1-800-291-8545, April 13, 2020
Zynga Inc. (ZNGA) | Daily Alert May 19
If you really want to become a better investor, then you need to be looking at where the smart money is heading. You need to understand what is truly driving the markets and how you can take advantage of these moves as—and before—they hit the mainstream. That’s how the long-term wealth can be found.
Zynga Inc. develops, markets, and operates social games as live services in the United States and internationally. The company’s games are played on mobile platforms, such as Apple iOS and Google’s Android operating systems, as well as on social networking sites, such as Facebook. It also provides advertising services comprising mobile and display ads, engagement ads and offers, and branded virtual items and sponsorships to advertising agencies and brokers, and licenses its own brands.
As analysts at Stephens recently noted, Zynga “is well-positioned for consolidation in the mobile gaming market,” as quoted by Barron’s. “We believe the next six to 18 months will be a period of consolidation as established mobile players further leverage their core publishing infrastructure by acquiring sub-scale studios to drive growth. Zynga has a proven ability to successfully execute.”
Better, it’s getting a boost from the World Health Organization’s note to play more video games. “We’re at a crucial moment in defining outcomes of this pandemic. Games industry companies have a global audience—we encourage all to #PlayApartTogether. More physical distancing plus other measures will help to flatten the curve plus save lives,” tweeted Ray Chambers, U.S. ambassador to WHO.
SunTrust Robinson Humphrey analyst Matthew Thornton is bullish on the stock as well, with a price target of $7.50. “The maker of mobile and social games is likely to hold up or perhaps benefit from the coronavirus outbreak,” as quoted by Investor’s Business Daily.
Ian Cooper, The Cheap Investor, firstname.lastname@example.org, May 2020