Bonus Idea: AlarmForce Industries (Toronto Stock Exchange: AF)
Zain Griffith of The Manual of Ideas presents a compelling microcap investment idea as a special bonus for our subscribers:
AlarmForce Industries (TSE: AF) operates in the security alarm industry. The shares represent an interesting opportunity to invest in an underfollowed, somewhat illiquid and undervalued Canadian micro-capitalization company (market value of ~C$50 million). While AlarmForce conducts most operations in Canada (~90% of subscriber base), it commenced a U.S. expansion effort in late 2004.
The thesis is to buy into a terrific business that generates maintenance free cash flow (MFCF) of more than C$6 million and returns on invested capital of 30-40%, with regional competitive advantages that appear to be replicable and defensible in various markets across Canada and the U.S.
The company has grown subscribers at a 19% compounded annual rate over the past decade and has a business model that lends itself to similar results in the future.
The AlarmForce model differs from the models of larger competitors such as ADT Security Services, a subsidiary of Tyco International (NYSE: TYC), and Brink’s Home Security (NYSE: CFL). AlarmForce acquires customers solely through TV, print and other forms of direct-to-consumer marketing. As a result, the entire investment in new subscribers is expensed in the current period instead of being capitalized and amortized over the estimated customer life. This conservative approach understates the true economic profitability of the AlarmForce business model, as current-period expenses boost revenue in future periods. Growth has been almost entirely financed through retained earnings, with minimal use of debt.
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Disclosure: The author of the above-referenced report, Zain Griffith. has a long position in AlarmForce.
