There’s much value to be found in spins, but not every spin is a winner. That’s the reminder from YCharts’ Jeff Bailey, who took a recent look at ADT’s(ADT) “alarming” performance. Despite a strong, post-spinoff start, the company plunged and has underperformed on poor earnings.
in October 2012, and after an initial rally ADT shares turned down. Cable television companies and others are piling into the home security space, making it harder for ADT to sign up new customers and increasing the customer defections it suffers. That steep plunge you see is reaction to ADT’s fiscal first quarter results, which obviously disappointed.So, there are some big business challenges for ADT, and they hardly came as a surprise to management. What’s odd is that the company, since the spinoff, has been among the most aggressive in buying back its stock, running up its debt levels to more than $4 billion and, in hindsight, one could argue, overpaying for the shares.As long as customer retention and pricing remain relatively high, ADT’s recurring revenue and strong margins are plenty adequate to handle the debt and even continue to reward shareholders with cash; the dividend yield is about 2.7% now. But should the home security industry grow more competitive, significantly affecting retention and forcing ADT into price cutting, the buybacks could come back to haunt the company.
A reminder, once again, that sometimes a spin off is an attempt to dispose of problems, and that investors ought to carefully analyze before buying.
Disclosure: The author holds no position in any stock mentioned