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Electronic security systems manufacturer Napco Security Technologies (NASDAQ:NSSC) reported results in line with analysts’ expectations in Q2 CY2024, with revenue up 12.7% year on year to $50.33 million. It made a GAAP profit of $0.36 per share, improving from its profit of $0.28 per share in the same quarter last year.
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Napco (NSSC) Q2 CY2024 Highlights:
- Revenue: $50.33 million vs analyst estimates of $50.26 million (small beat)
- Adj EBITDA: $15.42 million vs analyst estimates of $15.66 million (1.6% miss)
- EPS: $0.36 vs analyst expectations of $0.35 (in line)
- Gross Margin (GAAP): 55.3%, up from 50.6% in the same quarter last year
- EBITDA Margin: 30.6%
- Free Cash Flow Margin: 27.4%, similar to the same quarter last year
- Market Capitalization: $2.05 billion
Napco Security Technologies, Inc. (NASDAQ:NSSC) is a leading manufacturer and designer of high-tech electronic security devices, cellular communication services for intrusion and fire alarm systems, and school safety solutions.
Electrical SystemsLike many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.
Sales GrowthReviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Over the last five years, Napco grew its sales at an excellent 13.1% compounded annual growth rate. This is a great starting point for our analysis because it shows Napco’s offerings resonate with customers.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Napco’s annualized revenue growth of 14.7% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.
This quarter, Napco’s year-on-year revenue growth clocked in at 12.7%, and its $50.33 million of revenue was line with Wall Street’s estimates. Looking ahead, Wall Street expects sales to grow 12.7% over the next 12 months.
Operating Margin Napco has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 18.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Napco’s annual operating margin rose by 16.1 percentage points over the last five years, as its sales growth gave it immense operating leverage.
In Q2, Napco generated an operating profit margin of 27.7%, up 2.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.
Napco’s EPS grew at an astounding 29.8% compounded annual growth rate over the last five years, higher than its 13.1% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of Napco’s earnings can give us a better understanding of its performance. As we mentioned earlier, Napco’s operating margin expanded by 16.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Napco, its two-year annual EPS growth of 59.3% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, Napco reported EPS at $0.36, up from $0.28 in the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects Napco to grow its earnings. Analysts are projecting its EPS of $1.34 in the last year to climb by 16.7% to $1.56.
Key Takeaways from Napco’s Q2 Results While revenue beat by a small amount, adj. EBITDA missed. This was a mixed quarter, and the stock traded down 14.6% to $47.38 immediately following the results.
