Electronic security systems manufacturer Napco Security Technologies (NASDAQ:NSSC) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 9.7% year on year to $42.93 million. Its GAAP profit of $0.28 per share was 16.7% below analysts’ consensus estimates.

Is now the time to buy Napco? Find out by accessing our full research report, it’s free.

Richard Soloway, Chairman and CEO, commented, "As we complete the first half of Fiscal 2025, our performance has yielded mixed results. Our RSR increased 14.4% to $21.2 million and generated a gross margin of 91%, which was an improvement on last year's RSR margin of 90%. RSR represents 49% of total revenue in Q2 and our RSR had a prospective run rate of approximately $86 million based on our January 2025 recurring service revenue. For the quarter, our overall gross margin improved by over 400 basis points to 57.0% compared to 52.6% last year. The reduction in our equipment revenue was a result of lagging sales in intrusion and access alarm products and door locking devices, primarily as a result of reduced sales to two of our larger distributors, one of which we were informed made a corporate-wide decision to pull back on all purchases in an effort to reduce overall inventory levels, and a second distributor who is going through a management restructuring, which we believe delayed the authorization to approve transactions and resulted in reduced purchases. In addition, the timing of new project work for custom locking products has resulted in reduced sales of locking devices through Q2 of Fiscal 2025. In Fiscal 2025 we are completing a project related to a significant New York City building renovation which began in fiscal 2024. While we were disappointed in our overall equipment sales, we attribute the decline to timing and based on historical purchase activity of our largest distributors we anticipate improvement in equipment sales through the balance of Fiscal 2025."

Company Overview

Napco Security Technologies, Inc. (NASDAQ:NSSC) is a leading manufacturer and designer of high-tech electronic security devices, cellular communication services for intrusion and fire alarm systems, and school safety solutions.

Electrical Systems

Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.

Sales Growth

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Napco grew its sales at an impressive 11.8% compounded annual growth rate. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Napco’s annualized revenue growth of 7.7% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, Napco missed Wall Street’s estimates and reported a rather uninspiring 9.7% year-on-year revenue decline, generating $42.93 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 15.4% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and indicates its newer products and services will fuel better top-line performance.

Today’s young investors won’t have read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.

Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Napco has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 20%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Napco’s operating margin rose by 17.2 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Napco generated an operating profit margin of 26%, down 3 percentage points year on year. Conversely, its gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like marketing, R&D, and administrative overhead.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Napco’s EPS grew at an astounding 26.9% compounded annual growth rate over the last five years, higher than its 11.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Napco’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Napco’s operating margin declined this quarter but expanded by 17.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Napco, its two-year annual EPS growth of 38.3% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q4, Napco reported EPS at $0.28, down from $0.34 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Napco’s full-year EPS of $1.30 to grow 26.2%.

Key Takeaways from Napco’s Q4 Results

We struggled to find many resounding positives in these results. Its revenue missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 5.9% to $34.55 immediately after reporting.

Napco underperformed this quarter, but does that create an opportunity to invest right now? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.