Sound The Alarm, ALRM is Headed Higher

Brian Bolan

Updated Wed, Mar 15, 2017, 7:41 PM

Get ready for some upward revisions to the earnings estimates of Alarm.com (ALRM). The stock is a Zacks Rank #3 (Hold) right now but reported earnings after the close on Wednesday, March 15. The company posted revenues of $69.79M compared to the consensus of $63.95M. EPS of $0.19 was $0.06 better than the Wall Street consensus estimate.

In the release, the company guided Wall Street higher. FY2017 is now expected to produce revenue of between $322M to $325.5M and that is comfortably higher than the $300M consensus estimate. The company expects to earn $0.73 to $0.75 for the year and that is also above the $0.65 consensus estimate.

In late after hours trading, I see the stock at $33.39 up $2.76 or about 9%.

Estimates Likely Moving Higher

When a company raises guidance over the consensus you can expect the analysts to adjust their models. These models help them derive their earnings estimates which are used in the Zacks Rank. Since there haven’t been any earnings revisions over the last 60 days, ALRM is a Zacks Rank #3 (Hold). In the coming days I anticipate the stock to see several upward revisions which should help boost the Zacks Rank for this stock to a Zacks Rank #2 (Buy) or a Zacks Rank #1 (Strong Buy).

Acquisitions

ALRM made a few recent acquisitions and they were touched on during the conference call. During the call, management talked about how the ObjectVideo acquisition will allow customers to track cars and license plates or even customers in a store.

The Icontrol Networks deal closed in the quarter and the company mentioned how the Piper unit powers a portion of the ADT platform. The industry had been viewed as “we versus ADT” but that has changed with the advent of customer home protection services offered by cable companies.

An analyst questioned if the company was looking to a product offering around cars, and while the company would not commit on a specific answer, it was clear that it could be something coming down the road. Many times during the call management noted that they were maintaining a healthy level of spending for R&D. Having an expandable platform is key because the security business has been changing very rapidly.

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Outlook

As we think about the changes in home security, it is clear that people are adding devices and services thanks to the relative ease of the internet. Management noted on the call that people want these products and services to come from one source.

As an example, I have a Google Cam (formerly Dropcam) and while it is accessible via its own app I would like to see it be usable via my Amazon echo. Yes the Google Nest is controllable via the voice recognizing tool, but I would like more functionality. I often search on Amazon for devices that are compatible with Alexa since I have power out that is controlled by another company. It too has its own app and with only a few devices having multiple apps is already a pressure point for me.

With the strong revenue guidance, management believes that its products and services will be well received by customers.

Analysts Notes Coming

As I look at where most recommendations are, I see a few potential upgrades tomorrow. Goldman Sachs started coverage of the stock with a Neutral rating on January 31 and a $31 price target. The analyst for the firm asked about the potential for organic growth from Icontrol which allowed management to talk about how they were going to hold their cost structure constant and could expect about $66M in EBITDA which translates to better than 20% margin. It is possible that Goldman Sachs ups the stock to “Buy” tomorrow.

Raymond James downgraded the stock back on August 16 as the moved their rating to Market Perform from Outperform. Imperial Capital has the stock as “In-line” with a $30 price target.

Roth Capital started coverage on October 3 with a buy and a $33.50 price target. Don’t be surprised to see that price target moved to $37.50 range.

Maxim Group initiated with a buy rating and $37 price target on December 1. They are clearly the most bullish on the stock and for good reason. I would look for the Maxim price target to expand to $40 or more given the recently posted results.

Trading Range?

The stock has a 52 week high of $34.43, but don’t be too surprised to see a new level reached tomorrow. Why do I say this? Well back on October 31, 2016 some unusual call buying was spotted in ALRM. The call was a $35 strike with a March expiration. At the time, the stock was $29 and change so it was a pretty big reach. I see those same calls closing at $0.17 with open interest of 856 – so not anything to get too excited about.

What did catch my eye on the option chain was all the puts that moved the day of earnings. The 27.5 strike that expires on Friday saw 729 contracts vs open interest of 898. Check that open interest level tomorrow to see if those were all premium sellers as the put was paying $0.42.

I like the chances of several price target increases coming tomorrow. There is an outside chance we get an upgrade on the stock as well. Throw in the idea that some mildly aggressive calls were bought several months ago I and I like the chances of this stock trading over $35 on March 16 or soon thereafter. Either way, look for this stock to become a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy) in a day or two.