NAPCO Security Technology - NSSC

Quick Take

The bull thesis behind the shares of NAPCO Security Technologies (NSSC - $34) is fairly simple to explain: high margin “services” revenues are growing rapidly (30%) and will soon eclipse those of the equipment revenues (10%) for which they exist.  NAPCO makes door locks, fire alarm systems, and burglar alarm systems primarily for the commercial market, and that’s basically the equipment side of the business which carries maybe a 15% gross margin.  The company also provides recurring cellular services linking burglar and fire alarms with the appropriate authorities, but which carries an 89% gross margin.  At one point in time these services were provided by standard copper wire communications providers, but lately the company has found a nice little honey pot by providing customers with StarLink to their various safety solutions.  They single out NYC and Los Angeles as requiring “dual path radio that can utilize cellular or internet technologies for their communication function” and that have “gross margin for fire radio products is higher than the other Starlink solutions. The sales of fire radio products have contributed positively to our gross margin during the fiscal year ended June 30, 2023.”