Is Security Products Maker Napco Setting Up For Fresh Rally?

Shares of Napco Securities Technologies NASDAQ: NSSC are trading in a choppy fashion below their September 15 high of $45.48.

The stock jumped nearly 16% higher on September 13, following the company's fourth-quarter earnings report. Trading volume was nearly triple the average that day.

Napco is a small company, with a market cap of just $801.8 million. Its 50-day average trading volume is just 47,000, and the stock has a beta of 1.15, all of which adds up to a stock that may be more volatile than others.

Napco makes security products in the categories of intrusion, fire, video, wireless, access control, and door locking systems. Its products are used in commercial, industrial, institutional, residential, and government applications.

In the most recent quarter, earnings came in at $0.27 per share, up a whopping 238% over the prior year's quarter. Revenue was $35.4 million, up 54%.

Analysts expected earnings of $0.25 per share on revenue of $30.25 million.

According to MarketBeat earnings data, Napco topped Wall Street views in the past four quarters.

Revenue growth accelerated in the past two quarters. Earnings growth bounced back in the past two quarters after declining in 2020. Even so, the company remained profitable in 2020, although earnings dropped by two cents per share from 2019.

For the full fiscal year of 2021, Napco earned $0.81 per share, up 27% from 2020.

For fiscal 2022, analysts expect earnings of $1.23 per share, which would be a 52% increase. For fiscal 2023, that's expected to be $1.70 per share, up another 38%.

Analysts have a "buy" rating on the stock with a price target of $47.75, a 9.29% upside, according to MarketBeat data.

As is the case with many small companies, Napco has scant analyst coverage, and most of the coverage comes from smaller shops. On the day after the earnings report, three analysts, Cannacord Genuity, Lake Street Capital and B. Riley boosted their price targets on the stock.

Institutional ownership is the key that pushes a stock's price higher. That's true with companies of all sizes, but for small caps, it can be more difficult to attract institutional buyers. Not many Wall Street analysts cover these stocks. With low trading volume, it's not easy to attract many institutional investors, which means there's not much business for investment banks and other analysts to sell research.

In the quarterly report, Napco detailed several positive metrics.

• Recurring service revenue increased 43% to $9.5 million with a gross margin of 87%
• Adjusted EBITDA* grew 32% to $19.5 million or $1.06 per share
• For the full year, cash from operating activities for the year grew 123% to $23.0 million

In the earnings release, president Richard Soloway said, "The robust growth in recurring service revenue and the associated gross margin, as well as sales of the StarLink radios (which generate the recurring service revenues), continues to be primarily attributable to our commercial intrusion and fire alarm business, which was not significantly affected by Covid-19 as commercial buildings must be kept secure."

He added that the company's "commercial fire alarm business is a 'mandated, non-discretionary business' which means, in order to receive a certificate of occupancy for a building, a fire alarm system is mandatory and must always function in compliance with fire codes. Because of the essential nature and high profitability of this sector, the commercial fire alarm business continues to be one of the key areas on which we focus our resources."

Although Napco's price has moved higher in fits and starts, it's actually logged the following impressive performance numbers recently:

• One month: 13.51%
• Three months: 22.93%
• Year-to-date: 66.63%
• One year: 77.39%

Does that mean Napco is buyable right now? The rally may be getting a little long in the tooth. Its most recent breakout, following the earnings report, came after a third-stage flat base. It was actually the second attempt at a third stage base, after an earlier breakout on June 25 fizzled.

The current consolidation may go on to form a proper base, lasting five weeks or more. It's too soon to say, and the broader market is still choppy. Small stocks, in particular, can be whipsawed along with the market volatility.

Even if now is not the right moment to buy, Napco is worth keeping an eye on, as the fundamentals and business case bode well for future gains.