Tyco International Ltd. (TYC): ADT Corp (ADT) Must Find a Way to Reverse This Trend

Out on its own
The key word to remember when studying ADT is retention. Without retention, ADT fails, simply because it takes three years for the company to break even on a customer. This is why ADT is so adamant about superior customer service and high-quality products.

If a customer is retained, then ADT can rely on recurring monthly fees, which by the way, have increased. In Q3 2012, the average monthly revenue per customer stood at $38.86. In Q3 2013, it increased to $40.08. Of course, this wasn’t going to make customers happy, but it had to be done.

Customer attrition has been increasing. For example, the customer attrition rate in Q3 2012 was 13.2%. In Q3 2013, it increased to 13.8%. Since this is only a small sampling, consider that the customer attrition rate was 12.7% on Sept. 30, 2012. The trend is heading in the wrong direction. It’s unlikely that this is the fault of ADT. The company’s products and services are known to be top of the line. It’s more likely that ADT has been the victim of cost-cutting by consumers who are more nervous about their fiscal situation that they had been in the past. Regardless of the reason, it’s a negative trend.

If you only looked at revenue, which increased 2.3% to $833 million in Q3 year over year, you would think that the company was hitting on all cylinders, but the increased revenue is primarily tied to price escalations on existing customers and higher rates on new customers, not gross customer additions, which fell from 291,000 in Q3 2012 to 276,000 in Q3 2013.

Conclusion
Tyco International Ltd. (NYSE:TYC) and Pentair are moderate-risk, high-potential plays. They’re only considered moderate-risk, opposed to low-risk, because they’re not likely to hold up well if emerging markets stop emerging, the global economy slows, and the broader market falters.

ADT has managed to grow despite a consistently increasing attrition rate. This is an indication of strong management. On the other hand, it’s difficult to fight against industry trends over long periods of time. With consumers cutting costs at every angle possible, ADT doesn’t look to be a better investment option than Tyco or Pentair. None of these stocks is resilient, but Tyco and Pentair present more upside potential.

The article ADT Must Find a Way to Reverse This Trend originally appeared on Fool.com and is written by Dan Moskowitz.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

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