Why Napco Security Shares Have Fallen This Week

Actions of the main provider of security solutions Napco Security Technologies (NSSC -5.95%) were down about 18% in the past week as of 4 p.m. ET Thursday, according to data from S&P Global Market Intelligence. Despite narrowly squeaking past analyst expectations for its fourth-quarter earnings report last Friday, Napco Security was sent lower by the market.

While this reaction seems harsh, it’s worth remembering that the market probably priced Napco perfectly, with its stock already up 95% in the past year alone.

Napco Security: Justified price for perfection

The Napco Security platform spans the “full spectrum of security”, covering alarms and connectivity (intrusion, cellular and fire alarm systems), locking (architectural, mechanical and wireless locks) and access control (ID readers, control panels and video ). Napco is unique in that it is the only company in its partner group that spans all three of these areas, meaning it can be a one-stop shop for customers or work alongside already installed products.

In addition to this full suite of services, the company’s commercial, school and residential end markets are expected to grow by 8%, 11% and 12% respectively through 2026. As landline services are phased out in favor of Napco’s Wireless Security Communications, the company should thrive as businesses replace legacy security systems.

This cellular and wireless upgrade cycle is particularly critical for Napco as it generates valuable recurring service revenue (RSR). Growing at double the rate of the company’s total sales, RSR Napco now accounts for approximately 40% of total revenue. Generating gross margins of 90%, this rising RSR should continue to push the company’s profitability higher.

Trading at 29 times forward earnings, Napco Security has a premium valuation, but looks like a great “forever” holding thanks to its rising RSR and full security offerings.