A Board Member Likes the ADT Spinout

ADT Corp (NYSE:ADT) was spun out from Tyco International Ltd. (NYSE:TYC) in September 2012 as a pure-play home and business security business. As a spinout, this event received significant attention from many investors; these companies often make good investments because management of the new company can better focus on operations without having to satisfy the needs of the larger business (read more about spinouts).

Now a member of ADT’s Board of Directors, Thomas Colligan, has purchased 2,000 shares of the stock at an average price of about $47.35 according to a recent filing with the SEC. This gives Colligan almost 4,000 shares of ADT Corp, so this transaction has more than doubled his direct holdings. In addition to the positive nature of a spinout, we also like to see insiders buying a stock as it signals enough confidence in the company to ignore the benefits of diversification. We think that this is why insider purchases tend to be bullish signals on average (read more about studies on insider trading).

ADT Corp recently filed its quarterly report for the quarter ending December 2012, the first of its current fiscal year. Clearly comparisons to a year ago should be taken with a grain of salt due to ADT’s presence within Tyco at that time, but it’s necessary to get at least some information about how the business is performing. The report showed a small amount of revenue growth versus a year earlier, but a 13% increase in earnings due to higher margins (even accounting for some separation costs and an increase in SGA expenses). The 44 cents per share that ADT produced in the quarter annualizes to $1.76, or a price-to-earnings multiple of 27. This straight annualization assumes little seasonality, but also does not give ADT any credit for eliminating its separation costs or improving core operations as an independent business.

Wall Street analyst estimates for the forward fiscal year, ending in September 2014, imply a forward P/E of 24. That is a fairly high multiple, and so it appears that the market is being more optimistic about ADT’s prospects than the sell-side. In order to prove fairly valued at the current price- let alone undervalued enough to buy- either analyst consensus is dramatically underestimating the improvements that will be made at the company, or ADT will be able to generate higher earnings growth a couple years from now than it has been reporting. We’d be wary about depending on either factor. Read another analysis of ADT.

Let’s look at how ADT compares to other security related companies: