Secure Returns With These Security Companies

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The fear of terrorism and crime propels the demand for security and protection products. This industry will grow 4.5% annually, growing from $174 billion in 2010 to $220 billion in 2015. Companies in this industry are adopting various strategies to meet the growing demand for their products. This article analyzes three security companies which are expanding and increasing their product portfolios to capitalize on this opportunity.

Cost reduction methods for more benefits

Tyco International's (NYSE: TYC) American Dynamics division manufactures video surveillance security products. The company prices the products appropriately but has experienced weak demand due to quality issues. To enhance this division, Tyco recently announced its intent to acquire Exacq Technologies for $150 million in cash. The deal will close in late 2013. Exacq will develop the company’s video management system, which will strengthen its video security market. The deal will also expand its overall video technology portfolio. This acquisition will increase revenue by approximately $75 million in 2014.

The company also launched a cost reduction initiative called "branch in a box." The initiative will modify the business process infrastructure in the company’s branches and centralize all back-office work at one location. This will lead to cost savings of 5% at every branch. There are approximately 540 branches with a budget of $4.5 million per branch, so the company will save approximately $150 million this year with its "branch in a box" initiative.

Upgrading home security system for future benefits

he ADT Corporation’s (NYSE: ADT) Pulse, an automatic home security system, increased from 18.5% in the first quarter of 2013 to 23% in the second quarter. The company is updating Pulse by adding features to its security system in order to retain customers. In January, the company added a health monitoring system to its automatic home management service. This feature enables the homeowner and a caretaker to track the health of the owner. Further, on June 18, 2013, it introduced new video motion sensor technology for Pulse. This new feature will send an email or message to users when a camera detects movement in the house, including a video clip of the movement. Due to the addition of these unique features, Pulse subscribers are expected to increase by 1.25% every quarter.

The company’s loyalty desk program saved 70% of customers wanting to disconnect their security services. Approximately 30% of disconnects are due to non-payment. The company is tightening its policy and converting to an automatic payment system through credit cards. Currently 60% of the company’s customers are on the auto-payments system and 90% of new customer accounts are on automatic payment. The policy will stabilize customer attrition, which was leading towards revenue attrition. The attrition rate will be 13.7% in 2014, slightly below the expected 13.9% in 2013. With these events, the company's earnings per share will increase from $0.40 in the second quarter to $0.45 by the end of the year.

Acquisition for additional revenue

The U.S. federal government amended immigration laws to enhance national security. The law requires the detention of inmates who are present in the U.S. illegally or without complete documentation. With this amendment, prisoner populations will increase by 14,000 annually. The government has turned to private prison companies to fulfill the inmate housing need. The GEO Group (NYSE: GEO) is one of the largest private prison contractors in the U.S. and will acquire 40% of this inmate increase. This will lead to incremental earnings before interest, taxes, depreciation and amortization of $44 million for the company through 2018 and an increase in operating income of $0.35 per share by the end of this year.

With the growing number of inmates, the company acquired the Joe Corley Detention Center in Montgomery County, Texas. This will be beneficial as the company used to manage this center and is familiar with its operations. The deal closed on June 7, 2013 for approximately $65 million, funded from its free cash flows and available borrowing. This center has a facility of 1,287 beds to house inmates. It expected to generate annual revenue of $27 million.

Bottom line

All three of the above companies will benefit from the growing demand for security and protection products. Tyco’s new acquisition will enhance its product portfolio and will benefit from its cost reduction initiatives. ADT will continue to add features to its home automation security and will adopt various strategies to retain customers. The GEO Group's detention center expansion will also increase company revenue.

Looking at the potential of each company, I recommend a buy for all three.

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Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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