Rating Update: Stock Rating F-Lowest (11/11/19)-Alarm.com Holdings Inc (ALRM).

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BUSINESS

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for smart residential and commercial properties in the United States and internationally. The company provides interactive security solutions to control and monitor their security systems, as well as connected security devices, including door locks, motion sensors, thermostats, garage doors, and video cameras; and high definition video monitoring solutions, such as live streaming, smart clip capture, secure cloud storage, video alerts, continuous HD recording, and commercial video surveillance solutions. It also offers intelligent automation and energy management solutions, including scenes button, which adjust multiple devices; smart thermostat schedules; responsive savings; precision comfort; energy usage and environmental monitoring; geo-services; and demand response programs.
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INVESTMENT RATING

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ALRM is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Alarm.com Holdings has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. Alarm.com Holdings has a poor Power Rating of 21 and a very low Appreciation Score of 12, resulting in the Lowest Value Trend Rating.

Alarm.com Holdings’ stock is selling significantly above targeted value. The current stock price of $45.72 compares to targeted value 12 months forward of $20.
Alarm.com Holdings’ very low appreciation potential results in an appreciation score of 12 (88% of the universe has greater appreciation potential.)
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Alarm.com Holdings has a Power Rating of 21. (This poor Power Rating indicates that ALRM only has a better chance of achieving attractive investment performance over the near to intermediate term than 21% of companies in the universe.)
Factors contributing to this poor Power Rating include: recent price action has been unfavorable; is in a slightly weakened position current; and earnings estimate behavior for ALRM has been slightly negative recently.

INVESTMENT PROFILE

ALRM’s financial strength is high. Financial strength rating is 86.
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Relative to the S&P 500 Composite, Alarm.com Holdings Inc has moderate Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ALRM is normal risk. Relative weaknesses include: low historical profitability, high stock price volatility, and high earnings variability. ALRM’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. ALRM has unusually low market capitalization.

CURRENT SIGNALS

Alarm.com Holdings’ current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

Alarm.com Holdings’ current technical position is very weak. The stock price is in a 6.3 month down move. The stock has declined 26.5% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Alarm.com Holdings Inc (NASDAQ: ALRM) has recently experienced slight negative changes in fundamentals: the consensus estimate for December, 2020 decreased significantly.
The stock is currently rated F.
Alarm.com Holdings Inc (NASDAQ: ALRM) stock enjoyed a major increase of 10.3% on 11/11/19. The shares closed at $0.12. However, trading volume in this advance was below average at 72% of normal. The stock has been weak relative to the market over the last nine months and has declined -9.4% during the last week.

CASH FLOW

In 2018, Alarm.com Holdings generated a very significant increase in cash of +$49.73 million (+52%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$66.12 million. Non-operating uses consumed -$28.89 million (-44% of EBITDA). Cash taxes contributed +$9.82 million (+15% of EBITDA). Re-investment in the business amounted to -$13.65 million (-21% of EBITDA). On a net basis, debt investors removed -$6.92 million (-10% of EBITDA) while equity investors contributed +$23.24 million (+35% of EBITDA).
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Alarm.com Holdings’ Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Alarm.Com Holdings Inc Peer Group. In most years, Alarm.com Holdings was in the lower quartile. Currently, Alarm.com Holdings is substantially below median at -44% of EBITDA (-$28.89 million).

Alarm.com Holdings’ Cash Taxes, %EBITDA enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Alarm.Com Holdings Inc Peer Group. In most years, Alarm.com Holdings was in the top quartile. Currently, Alarm.com Holdings is upper quartile at +15% of EBITDA (+$9.82 million).

Alarm.com Holdings’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Alarm.Com Holdings Inc Peer Group. In most years, Alarm.com Holdings was in the top quartile. Currently, Alarm.com Holdings is upper quartile at -21% of EBITDA (-$13.65 million).

Alarm.com Holdings’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Alarm.Com Holdings Inc Peer Group. In most years, Alarm.com Holdings was in the second quartile. Currently, Alarm.com Holdings is slightly above median at -10% of EBITDA (-$6.92 million).

Alarm.com Holdings’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Alarm.Com Holdings Inc Peer Group. In most years, Alarm.com Holdings was in the second quartile. Currently, Alarm.com Holdings is above median at +35% of EBITDA (+$23.24 million).

Alarm.com Holdings’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Alarm.Com Holdings Inc Peer Group. In most years, Alarm.com Holdings was in the top quartile. Currently, Alarm.com Holdings is upper quartile at +75% of EBITDA (+$49.73 million).
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Alarm.com Holdings’ Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Alarm.Com Holdings Inc Peer Group. In most years, Alarm.com Holdings was in the top quartile. Currently, Alarm.com Holdings is at the upper quartile at +35%.

PROFITABILITY

Alarm.com Holdings’ return on equity has improved very significantly since 2015.
Alarm.com Holdings’ very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a significant analytical factor.
The productivity of Alarm.com Holdings’ assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend although it recently stabilized from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Alarm.com Holdings’ return on equity is above median (14.4%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is above median (10.5%) reflecting asset turnover that is at the upper quartile (0.94X) and above median pretax margin (11.1%).
Tax “keep” rate (income tax management) is at the upper quartile (92.3%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is substantially below median (1.49X).

GROWTH RATES

There are no significant differences between Alarm.com Holdings’ longer term growth and growth in recent years.
Alarm.com Holdings’ historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been -29.7% per year. (More recently it has been 21.7%.)

Total asset growth has been -25.2% per year. (More recently it has been 21.7%.)

Annual E.P.S. growth has been 41.4% per year.

Equity growth has been 17.2% per year.

Alarm.com Holdings’ consensus growth rate forecast (average of Wall Street analysts) is 15.0% — substantially above the average of the historical growth measures.
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Relative to the Alarm.Com Holdings Inc Peer Group, Alarm.com Holdings’ historical growth measures are erratic. E.P.S. growth (41.4%) has been above median. Equity growth (17.2%) has been above median. Revenue growth (-29.7%) has been lower quartile. Total asset growth (-25.2%) has been lower quartile.

Consensus growth forecast (15.0%) is at median.
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PRICE HISTORY

Over the full time period, Alarm.com Holdings’ stock price performance has been exceptional. Between September, 2015 and November, 2019, Alarm.com Holdings’ stock price rose +292%; relative to the market, this was a +144% gain. Significant price move during the period: 1) September, 2015 – October, 2017: +300%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 11.1% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 11.1% is slightly above median relative to Alarm.com Holdings Inc Peer Group.

Current 5-year total return performance is not available.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ALRM’s overall valuation is quite high. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the ratio of enterprise value/earnings before interest and taxes, then by the price/earnings ratio, then by the price/equity ratio. The lowest factor, ratio of enterprise value/revenue, is above median.
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Alarm.com Holdings has a very large value gap compared to the median valuation. For ALRM to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 4.57X to 3.39X. If ALRM’s ratio of enterprise value/revenue were to fall to 3.39X, its stock price would be lower by $-11 to $34.
For ALRM to fall to lower quartile valuation relative to the Alarm.com Holdings Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 4.57X to 2.07X. If ALRM’s ratio of enterprise value/revenue were to fall to 2.07X, its stock price would decline by $-24 from the current level of $46.

VALUE TARGETS

ALRM is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Alarm.com Holdings’ current Price Target of $21 represents a -55% change from the current price of $45.72.
Alarm.com Holdings’ very low appreciation potential results in an appreciation score of 12 (88% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 12, the low Power Rating of 21 contributes to an Value Trend Rating of F.
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Alarm.com Holdings’ current Price Target is $21 (+52% from the 2018 Target of $13 but -55% from the 11/11/19 price of $45.72). This dramatic rise in the Target is the result of a -4% decrease in the equity base and a +59% increase in the price/equity multiple. The forecasted decline in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 25.3% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2013 and 2018. The current forecast is significantly above the 2014 low of 4%.

PTR’s growth forecast is 3.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2013 and 2018. The current forecast is well below the 2015 peak of 8%.

PTR’s cost of equity forecast is 9.8% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2015 and 2018. The current forecast is above the 2015 low of 5.7%.
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At Alarm.com Holdings’ current price of $45.72, investors are placing a negative value of $-6 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of -2.0% per year, and a return on equity of 21.6% versus a cost of equity of 8.2%.
PTR’s 2020 Price Target of $21 is based on these forecasts and reflects an estimated value of existing assets of $28 and a value of future investments of $-7.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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