Napco: Down 15% on earnings - Buying opportunity?

Today, Napco dropped 15% after reporting earnings. This is after the stock was up 65% YTD and is now still up 40%. Let’s review the earnings to see if there are any issues and if this presents a buying opportunity.

Earnings review

Napco reported record sales, net income, recurring revenues and adjusted EBITDA. The results aligned with analysts: Sales and GAAP EPS beat marginally, non-GAAP EPS beat by 15% and EBITDA missed by 1%—nothing that would warrant a 15% drop in share price.

Sales grew 13% Y/Y to $50.3 million, with recurring revenues increasing 27% (40% of revenues) and hardware sales by 5%. Net income increased 27% to $13.5 million and adjusted EBITDA grew 18% to $15.4 million. Recurring gross margins stayed at a high level above 90% and EBITDA margin reached 31%. Hardware gross margin, which was under pressure last year, reached 31% again in the quarter. The company expects to scale hardware margins close to 50% over time.

The balance sheet was another highlight, with net cash rising to $97.7 million, up $31 million year over year. Accordingly, the dividend was raised by 25%. Napco continues to generate more cash than it can reinvest, and it should consider distributing more of it back to shareholders.

Let’s see if there were any issues arising in the earnings call.

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