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M C I NTIRE I NVESTMENT I NSTITUTE A T THE U NIVERSITY OF V IRGINIA (NYSE : ADT - Long) Prepared by...

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MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA (NYSE : ADT - Long) Prepared by K. Wey and J. Wulkan, Memo by H. Freund| Jan. McIntire Investment Institute 1
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MCINTIRE INVESTMENT INSTITUTEAT THE UNIVERSITY OF VIRGINIA

(NYSE : ADT - Long)

Prepared by K. Wey and J. Wulkan, Memo by H. Freund| Jan. 23, 2013

McIntire Investment Institute1

INVESTMENT THESIS

Market Leader:28% Market Share, Durable Brand, Premium

Pricing

ADT Pulse Integrated Security:Higher ARPU, Lower Churn, Undervalued

McIntire Investment Institute2

Substantial Tailwinds:Insurance Discounts, Pre-wiring, False-alarm

ReductionMultiple Opportunities to Win:

Share Repurchases, Acquisition Target

FINANCIAL OVERVIEW

Price: $47.98 Avg Vol (3m): 1.90MOperating Margin: 23.14%

Market Cap: $11.15B P/E (ttm): 28.74EV/EBITDA: 10.10

Range: $34.68-48.91 Current Ratio: 0.77Debt/Equity: 0.80

McIntire Investment Institute3

Entry point

ADT IS A MARKET LEADER – 28% SHARE

4 McIntire Investment Institute

Market Share Breakdown shows ADT dominates

ADT ABLE TO CONSOLIDATE THE MARKET

5 McIntire Investment Institute

GROWTH AT EXPENSE OF MOM & POP DEALERS

Price raises are “great…[ADT raises] rates and a few people leave for the lower cost

providers, as those smaller players grow larger, ADT

buys them; everything in this industry leads to ADT"

ADT can “get parts for $200. The same parts cost me

$750-$1200. Hard to compete….totally depressing

small guys”

ADT’s brand and legacy are significant competitive advantages, creating “a

phenomenal need, without ADT people wouldn’t buy home security”

Brand image is reinforced by “advertising…helped make ADT a

household name” (VAR) and expands the “addressable market

significantly…[as customers] see it in the mainstream”

INTEGRATED SECURITY – ADT HAS FINGER ON THE PULSE

McIntire Investment Institute6

INTEGRATED SECURITY GROWING AT 23% CAGR

McIntire Investment Institute7

Benefits:1) Lower attrition

rate2) Higher ARPU3) ADT leader

PULSE ADOPTION RATES SET TO INCREASE

McIntire Investment Institute8

STREET UNDERESTIMATES PULSE ADOPTION

BY 40%

VAR: INCREASE IN # OF CUSTOMERS OPTING FOR PULSE (VS. STREET – CONSTANT)

TAILWINDS TO HOME SECURITY ADOPTION

McIntire Investment Institute9

Insurance

discounts

Pre-WiringFalse-

Alarm

Reductions

Price

Poor

Service

FAVORABLE VALUATION WITH MULTIPLE WAYS TO WIN

McIntire Investment Institute10

CABLE OR TELCO BUYOUT YIELDS EVEN HIGHER UPSIDE

McIntire Investment Institute11

BUYBACK PROVIDES 3RD WAY TO WIN

McIntire Investment Institute12

L-ADT = SUBSTANTIAL RETURNS FOR MII

McIntire Investment Institute13

Pulse propels ADT to higher price, MII to higher profits

Price Target: $61Upside: 27%

Higher Pulse penetration forms solid base-case

ADT continues to serve as home security market leader

Home security tailwinds push ADT to profitability

Share repurchases or ADT acquisition yield highest upside potential

FourWays to Win

with ADT


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