As previously reported on BRIDGE, a combination of monetary and fiscal stimulus caused significant price distortions across several industries. These distortions were driven by short-lived demand surges and occasional shifts in consumer behavior, which in turn fueled speculative activity.

Notably, long-duration assets within software infrastructure and information technology services saw investors' initial enthusiasm focused on high growth potential, negative earnings, and a strong emphasis on Research and Development (R&D) . This led to inflated valuations, buoyed by excessive market froth. However, when central banks shifted to a tightening cycle to combat inflation, these sectors experienced sharp reversals.

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

The cyclical nature of these industries became evident as the short-term positive spread relative to benchmarks turned negative. In stark contrast, the security and protection industry, particularly in the residential and commercial building sectors, underperformed during the speculative frenzy that persisted for several quarters post-pandemic.

The short-duration nature of these companies meant they lagged behind, while long-duration assets enjoyed double-digit positive spreads. Yet, as monetary policies became less accommodative, the industry’s relative insensitivity to interest rates proved advantageous.

Key factors supporting the industry's resilience include predictable cash flows (primarily driven by B2B customers), the gradual return to pre-pandemic commercial building occupancy, organic growth, and improved operational efficiency. Over the past three years, the industry outperformed the benchmark with a 20% gain on an equal-weight basis.

Additionally, median gross and operating margins surged by over 30% compared to pre-pandemic levels, while margins for many long-duration assets remained stagnant. Despite higher median debt levels, the security and protection industry was less affected by rising discount rates.

Fig 3: Operating Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

While median price-to-sales ratios for sectors like software infrastructure, utilities, renewables, and information technology services halved from Q2 2021, the ratios for the security and protection industry remained stable. Napco Security Technologies stands out as a clear industry leader, outperforming the benchmark by 55% over the past three years.

Benefiting from multiple tailwinds related to residential and commercial security, as well as large-scale infrastructure projects, Napco has demonstrated a faster growth rate, broader segment diversification, lower debt burden, and bottom-line margins that are three times higher than the industry median.

Fig 5: Net Income Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 6: Performance [1YR]

BRIIDGE Shortcut: TS Reference Index

Fig 7: Dividend Yield

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 8: Net Debt To Ebitda [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA