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ADT: a 'Safe' Housing Bet, With a Hint of Apple's iPhone, Buffett

NEW YORK ( TheStreet) -- Two stock market strategies that have worked well lately are the bouncing-off-a-bottom U.S. housing market and, less surprising, the unstoppable Apple (AAPL). A longer-term concept that has worked well in picking winners is Warren Buffett's philosophy of targeting "moated" businesses -- those with a limited number of formidable competitors operating in stable industries where the need for the core product or service is predictable.

Now, there's a way to target all three themes, with varying degrees of intensity, in one stock: Tyco International's (TYC) newly spunoff home security unit ADT (ADT - Get Report). It's primarily a play on the health of the U.S. real estate market -- and a "stable" one given its "moat-like" market share -- while also tapping growth opportunities offered by new technologies and widespread adoption of gadgets like smartphones and tablets.

ADT has the market lead in providing home security monitoring systems with 6.4 million customers, roughly 25% of a highly fragmented market. While ADT isn't a high growth company compared with some new equity listings, it is growing revenue at more than double the industry average and operates in an environment of limited national competition that makes it unlikely that the existing 6 million-plus customer base will switch to competitors anytime soon.

On Monday, ADT shares hit the New York Stock Exchange, rising nearly 3% from an offer price just above $35 share to close its first trading day at $37.27. The company, which posted $3.1 billion in 2011 revenue, will become a component of the S&P 500 Index replacing Lexmark International (LXK).

In a conversation on ADT's first day of trading, ADT's chief executive Naren Gursahaney highlighted the company's high brand awareness and market position, while pointing out that 90% of ADT subscribers are recurring customers, giving the company strong cash flow dynamics.

With a network of 4,500 in-house sales representatives and an additional 4,000 technicians, the company has to make a big upfront investment in growing the customer count -- roughly $1,725 per new subscriber through its direct sales channel and $1,200 through a dealer network of a similar size, according to Morningstar. However, Gursahaney notes new ADT subscribers become cash flow positive for the company in just under three years -- the life of an initial subscription -- highlighting the value of a 90% recurring customer base.

"I think that this will continue to be a strong growth story," says Gursahaney, who highlights the fact that ADT's recurring subscriber revenue grows at between 5% to 7% a year. That compares with an industry that has grown just 10.6% over the past six years to $12.5 billion in revenue, according to ADT research.

While ADT's existing brand already tracks at a faster growth rate than the industry, Gursahaney says the company has a "tremendous runway for growth," as it develops its more technologically advanced ADT Pulse -- a home security product that leverages new technologies to connect mobile devices, media and automation -- which could draw in new subscribers into home security systems that cost $50 a month versus base offerings that cost $40 a month. Meanwhile, existing subscribers may look to upgrade, given the platform's mobile connectivity and its use of home security automation technologies.

The Pew Internet Project reports that half of American adults now own a smartphone or tablet (45% of adults own a smartphone specifically; 18% own a tablet or e-reader).
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ADT $41.98 0.00%
CMCSA $60.76 0.00%
T $38.82 0.00%
TWC $212.11 0.00%
AAPL $93.74 0.00%


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