ADT Inc. (NYSE: ADT) is a leading provider of automated security solutions for over six million customers in more than 200 locations throughout the United States. Headquartered in Florida, the company was founded 145 years ago as a telegraph business and has since been transformed into an industry pioneer. Today, the company’s brand and national presence are unmatched, resulting in market-leading share, a highly recurring revenue base, and attractive free cash flow generation to deploy for future growth. While ADT is facing increased competition from new entrants including Google and Amazon, the company has strengthened its moat1 and growth prospects by partnering with its competitors to enhance its market position.
Opportunity Remains Despite Shifting Trends
Although ADT leads the U.S. security market, penetration for professionally installed residential security has been stagnant for several years. Since returning to public markets in early 2018, ADT’s stock price has languished, largely due to investor concerns around its growth prospects amidst an influx of “do-it-yourself” competitors including Amazon’s “Ring” or Google’s “Nest,” which are direct-to-consumer “smart home” technologies installed by residents. These products have gained popularity throughout the COVID-19 pandemic – which has heightened interest in home security. As a result, many investors believe these nascent offerings will continue to gain market share. We take a different view. Ariel sees the pandemic as an increased opportunity for ADT to leverage its trusted brand and unmatched professional installation network as a partner of choice for these smart home innovators. There is room for ADT to participate alongside other providers and take advantage of the long-term secular growth in home automation.
Growing With Google
In August 2020, ADT announced a strategic partnership with Google to provide a co-branded smart home solution, called ADT+Google. This transaction provided the opportunity for ADT to combine its trusted security, professional installation and monitoring service with Google’s award-winning “Nest” hardware to create a fully integrated set of devices, software and services for the secure smart home. Google also invested $450 million to acquire a 6.6% stake in ADT, which demonstrates its long-term commitment to this partnership. Both companies contributed $150 million for co-marketing, product development, technology and employee training. This alliance has provided customers with integrated smart home services in both do-it-yourself (DIY) and professionally installed security offerings, with endless opportunities for future growth. While ADT has previously embarked on other strategic initiatives with industry peers that include Samsung and D.R. Horton, this one is critically important and different. The Google partnership financially aligns ADT with a tech giant. Google gets the benefit of working with the most respected brand in the automated security space.
A Highly Recurring Potential Margin of Safety2
In addition to those underappreciated growth prospects, ADT enjoys a high degree of recurring business that generates excellent free cash flow. Much like an insurance company, customers pay ADT for peace of mind, regardless of whether they use the service or not. As a result, approximately 80% of revenues are recurring. Most customers sign up for multi-year contracts. Even in today’s uncertain economic environment, cash flow generation has been strong and gives ADT the firepower to invest in innovation, pay down debt and return capital to shareholders.
A Long Term View
These days, investors are distracted by the rearview mirror. By contrast, we take a long-term view and believe in the power of the pandemic’s acceleration of smart home adoption. As a market-leading brand, ADT can leverage its attractive free cash flow profile and vastly underappreciated growth prospects. These opportunities are made stronger by the company’s partnership with Google. As of June 30, 2021, shares traded at $10.79, a 29% discount to our private market value of $15.29.
1 An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces.
2 Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.
BOK Financial Corporation (NASDAQ: BOKF) is a regional bank headquartered in Tulsa with over 100 years of experience in energy lending. Since its founding in 1910, the company has diversified its offerings and expanded into new geographies. Beyond its roots in traditional lending, BOK Financial generates approximately 40% of its revenue from a variety of fee income businesses including: consumer banking; brokerage trading; investment, trust and insurance services; mortgage origination and servicing; and an electronic funds transfer network. BOK Financial operates banking divisions across eight states as the following brand names: Bank of Albuquerque; Bank of Oklahoma; Bank of Texas; as well as BOK Financial in Arizona, Arkansas, Colorado, Kansas and Missouri. The company also has limited purpose offices in Nebraska, Wisconsin and Connecticut.
Current chairman and majority shareholder George Kaiser purchased the company out of FDIC receivership for $61 million in 1991. Mr. Kaiser’s conservative, long-term approach is embedded in the firm’s culture and has rewarded investors. Under his watch, the business has grown from under $2 billion to nearly $50 billion in assets. During this time, earnings per share have increased almost 9% per year.
A Different Approach Amid Industry Headwinds
Banks have experienced substantial consolidation in recent decades, making it difficult for many small competitors to survive. BOK Financial has remained resilient. The company is an outlier, setting itself apart through a superior approach to underwriting and risk management. For example, oil price volatility continues to create a challenging environment for most lenders. Yet, BOK Financial’s internal team of petroleum engineers and technicians, rigorous underwriting methods and conservative lending criteria, and long history in the space have driven solid credit performance throughout market cycles. The company replicates this same approach across its broader lending business. Consistency has been the key to success throughout BOK Financial’s long history.
The BOKF stock has experienced relative underperformance that was consistent across the banking sector. Fiscal stimulus and quantitative easing have spurred a robust recovery and rebound in oil prices. While this is generally positive for BOK Financial, it has also elevated inflation concerns and clouded the interest rate outlook. Industry loan growth still faces headwinds due to the stimulus, high consumer savings rates and cautiously optimistic commercial borrowers.
More Upside on the Horizon
The company’s loan portfolio held up in the depths of the pandemic, despite oil prices plunging below $20. This is a testament to the company’s steady and stringent underwriting approach. While we cannot predict when the current macroeconomic volatility will dissipate, we are confident in the long-term viability of the US economy. Ariel believes BOK Financial will benefit from the more normalized environment on the horizon.
BOK Financial currently trades at a 31% discount to our private market value of $124.98.
Meredith Corporation (NYSE: MDP) has been committed to journalism since its founding in 1902. Today, through its national and local media subsidiaries, the company has a content portfolio that spans pop culture, entertainment, food, fashion and lifestyle, news, business and finance, as well as sports. Its well-known national media brands include PEOPLE, Better Homes & Gardens, Southern Living and Allrecipes magazines, among others. Its 17 television stations serve 12 markets and reach 11 percent of U.S. households.
Unlocking Shareholder Value
Meredith shares have surged +126% so far this year. The company has proactively sought opportunities to deliver shareholder value following a long stretch of poor returns. In 2018, Meredith significantly underperformed the equity markets after its ill-timed acquisition of TIME, Inc. Prior to that purchase, disappointing results within its magazine business, compounded with the negative impact of higher-than-expected debt, caused its stock price to lag.
Although political advertising in its television station group has driven the company’s solid free cash flow, Meredith recently implemented a multi-phased effort to boost returns – including a number of strategic transactions to raise capital. Meredith sold TIME, Sports Illustrated, Money, FORTUNE as well as Travel + Leisure. The company also suspended its quarterly dividend last year at an average annual savings of approximately $113 million. Proceeds were allocated to paying down debt.
In May 2021, Meredith took advantage of the broader trend of broadcast television consolidation by selling its Local Media Group for approximately $2.7 billion, or $14.50 per share in cash, to Gray Television. Competitive bidding forced Gray to raise its offer by nearly 5%. The ultimate transaction price was $2.83 billion, which was in-line with our estimated value of the properties.
Once the company receives shareholder approval for this sale, it plans to spin off its national media group. The newly streamlined Meredith is expected to re-structure its business into two categories: Digital and Magazine. Despite these changes, the company will maintain its dual-class stock structure, its longstanding Iowa headquarters, its executive team, and the ticker, MDP. Shareholders will receive an estimated $16.99 in cash per share and own a less-levered, multi-platform, digitally-focused lifestyle media company, led by its iconic PEOPLE franchise.
An Iconic Gem
PEOPLE is the crown jewel of Meredith’s portfolio. It is not only a global industry icon – it is also the most profitable entertainment media brand. By our estimates, it is quickly approaching half of Meredith’s National Media Group’s current operating cash flow. We believe the PEOPLE franchise is undervalued given its leading position in entertainment, whether in print, digital or in daily syndication. Plus, upside exists as Meredith works with Sony Pictures Television to syndicate PEOPLE (THE TV SHOW!) beyond Meredith’s television stations to a broader set of stations, including Gray’s television stations, in the fall of 2022.
Strong Prospects Ahead
Despite its forthcoming increased exposure within the consumer magazine industry and significant competition for digital advertising dollars, Meredith’s digital business has the brand names and scale to compete. Digital is quickly approaching half the company’s revenue and has a stronger capital profile. In the future, post-transaction close, we expect a more focused Meredith. Its leading position among female audiences and its refined structure should deliver results beyond the market’s expectations. As of June 30, 2021, shares traded at $43.44, a 14% discount to our private market value of $50.60.
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On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds. The information and our opinions were current as of May 3, 2021, but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased, sold, or recommended to investors during the period. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.