We came across a bullish thesis on Napco Security Technologies, Inc. (NSSC) on Heavy Moat Investments' Substack by Heavy Moat Investments. In this article, we will summarize the bulls' thesis on NSSC. Napco Security Technologies, Inc.'s share was trading at $41.89 as of Oct 17. NSSC's trailing and forward P/E were 31.26 and 24.69 respectively according to Yahoo Finance.
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Napco's stock plummeted 20% following an earnings miss and a critical short report by FuzzyPandaResearch (FP), a notable short seller with a mixed track record. FP has previously targeted companies in sectors like electric vehicles (EV), such as Lucid and Fisker, often capitalizing on market exuberance. However, Napco, with its long history of consistent revenue growth and shareholder returns, presents a different challenge.
FP's allegations against Napco focus on a series of claims, including possible accounting fraud driven by its CFO, insider selling, and concerns over the sustainability of its recurring revenue margins. FP is skeptical of Napco's reported gross margins of 90% in its recurring revenue segment, implying they are hiding costs, though Napco pointed out that peer Alarm.com reports similar margins. FP also questioned the legitimacy of Napco's production process, claiming that the company re-imports locks from China rather than manufacturing them in-house as claimed. Moreover, FP raised concerns about Napco's entry into the residential market with its Prima product, suggesting that success there will be limited.
Napco quickly responded to these accusations, stating that the allegations stemmed from a disgruntled former employee with no knowledge of its accounting processes. They also emphasized that an independent investigation conducted by a global law firm found no evidence to support the claims. Furthermore, Napco detailed steps it has taken to strengthen internal controls, including the hiring of Deloitte to audit its processes, which the company argued would be unlikely if they intended to deceive investors. While insider selling can often raise concerns among investors, in the case of Napco, it may actually signal a thoughtful succession plan or potential future sale. The company's explanation that both the CEO and CFO are in their 70s suggests that their stock sales are a reasonable step in preparing for retirement.
Napco's management dismissed FP's claims, particularly regarding the sustainability of its recurring revenue margins, citing its commercial focus and peer comparison. While FP's skepticism about the company's foray into the residential market may hold some merit, Napco's commercial success remains solid. Despite the stock's recent sharp decline, many of FP's accusations appear to be either public knowledge or unverifiable, reducing their overall impact. With Napco addressing its internal issues and providing clarity on its margins, the company's long-term outlook remains positive.
NSSC stock is currently trading at a forward PE of 25 and the company has been growing its topline by around 10-11% annual rate recently. Based on these numbers, NSSC isn't really a cheap stock.
Napco Security Technologies, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 20 hedge fund portfolios held NSSC at the end of the second quarter which was 23 in the previous quarter. While we acknowledge the risk and potential of NSSC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NSSC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.