Napco Security Technologies: Safeguarding your portfolio.

Napco Security Technologies is a leading provider of electronic security solutions, offering everything from locks and access control systems to intrusion alarms, fire safety devices, and video surveillance. Over the years, the company has shifted its business model toward high-margin recurring revenues through its StarLink communication services, which now account for nearly half of total sales. With growing demand for school security, a strong pipeline of innovative cloud-based products, and a track record of high returns on invested capital, Napco is positioning itself as a resilient and capital-efficient player in the security industry. The question is: Does this security specialist deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me

For full disclosure, I should mention that I do not own any shares in Napco Security Technologies at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Napco Security Technologies, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Napco Security Technologies is a U.S. manufacturer and designer of high-tech electronic security solutions with operations dating back to 1969. The company provides a diversified portfolio of products that includes door security devices such as electronic and mechanical locks, locksets, panic devices and access-ready door hardware, intrusion and fire alarm systems with control panels, detectors and communicators, access control systems ranging from standalone digital locks to enterprise-class networked solutions, and video surveillance systems that integrate with alarms and access. It has also developed a strong position in school and public safety, offering solutions from classroom locks to centralized campus lockdown systems. A central part of the business model is the recurring communication services attached to its hardware, particularly through StarLink cellular communicators and the Networx Operations Center. Dealers and installers pay monthly fees to enable real-time monitoring, which has become the most profitable growth driver for Napco. In fiscal year 2025, nearly half of sales were coming from recurring service revenues that carry gross margins of about 91%, providing stability and resilience compared to the more cyclical equipment sales. Napco’s moat is based on the breadth of its integrated product ecosystem, which spans fire alarms, intrusion systems, access control, door locks and video surveillance. This makes it a one-stop shop for security dealers and end users. By linking hardware sales to cloud and cellular communication services, Napco locks in long-term recurring revenues with high margins and creates switching costs for dealers who depend on its platform. The company has also built a national network of trusted independent distributors and installers, which provides entrenched channel strength that is difficult for competitors to replicate. In addition, many of Napco’s products carry Underwriters Laboratories certification, the gold standard in the industry, which is a key advantage in regulated markets such as schools, healthcare and government institutions. Altogether Napco combines the reliability of an established security brand with a business model that blends hardware sales and high-margin services.

Management

Richard L. Soloway serves as the Chairman and CEO of Napco Security Technologies, a company he has led for several decades. He brings more than thirty years of experience in the security industry, during which he has overseen the transformation of Napco into a diversified provider of high-tech electronic security solutions and high-margin communication services. Under his leadership, Napco has emphasized growth, profitability, return on equity, and disciplined cost control, while maintaining strong alignment with shareholders through significant insider ownership, with senior management holding roughly ten percent of the company’s equity. Richard L. Soloway has demonstrated an ability to navigate periods of disruption with strategic foresight. During recent global supply chain challenges, when critical microchips were in short supply, he made the decision to pay premiums to secure components from brokers, ensuring that Napco could continue delivering products while many competitors faced delays. Although this approach temporarily pressured margins, it allowed the company to capture new accounts that are expected to drive long-term recurring revenue growth. This willingness to prioritize customer relationships and market share over short-term profitability reflects a long-term mindset that has strengthened the company’s positioning in the industry. Throughout his tenure, Richard L. Soloway has cultivated Napco’s reputation for reliability and innovation, overseeing the expansion of its portfolio to include industry-recognized brands and solutions tailored for high-demand markets such as school safety and healthcare security. His leadership is characterized by a focus on operational resilience, strategic investment in research and development, and the pursuit of recurring revenue opportunities that provide both stability and profitability. Given his extensive industry experience, shareholder alignment, and proven ability to guide Napco through challenging environments while positioning it for sustainable growth, I believe Richard L. Soloway is well-equipped to continue leading the company successfully into its next phase of development.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Napco has achieved high ROIC because more of its business is coming from recurring revenue through communication services. Since 2012, the company has built a large base of subscription fees tied to its StarLink cellular communicators and Networx Operations Center. These services have gross margins of around 90% and require very little extra capital to grow, which means each new dollar of revenue generates very high returns. Traditional hardware sales, like locks and alarm panels, are more capital-intensive and cyclical, so the shift toward services has made Napco’s returns both stronger and more stable. The company has also kept its balance sheet conservative, avoiding heavy debt and large capital expenditures, which helps more of its profits flow through as returns on invested capital. ROIC climbed above 20% in the past two years as recurring revenues grew to nearly half of total revenue by 2025. That amplified profitability without requiring more capital. The slight decline in fiscal 2025 happened because equipment sales, especially door-locking products, slowed due to distributor destocking and tariff-related uncertainty. At the same time, operating expenses rose, which put pressure on margins. Even so, recurring revenues kept growing strongly, and Napco still delivered ROIC above 20%, the second-highest level in its history. Looking ahead, Napco’s ROIC should stay well above its historical averages as recurring revenues continue to grow as a share of the business. With communication services already at 48% of sales and expanding at double-digit rates, the company’s capital efficiency should remain strong. There will likely be short-term swings due to hardware demand, the timing of school security projects, or tariff policy, but the long-term trend points to sustained high ROIC.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Napco has managed to increase its equity every year because the company has consistently generated profits, reinvested earnings back into the business, and maintained a conservative balance sheet with little debt. As recurring revenues from communication services grew, margins expanded, cash generation improved, and equity steadily compounded. This explains why equity rose year after year up to fiscal 2024. In fiscal 2025, equity decreased for the first time, though it still reached the second-highest level in the company’s history. The decline was mainly the result of lower net income compared with the prior year, as hardware sales slowed due to distributor destocking and tariff uncertainty, while operating expenses rose. These factors reduced profitability, which in turn slowed the compounding effect that had steadily increased equity in previous years. Importantly, the drop in equity was not driven by structural weakness or balance sheet stress but by temporary business conditions. It is not something to be overly worried about because the company’s recurring revenue base continues to expand at double-digit rates and already accounts for nearly half of total sales. These high-margin services provide a strong and growing earnings foundation, which supports the return to equity growth in the years ahead.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Napco reached its highest free cash flow and free cash flow margin ever in fiscal year 2025 because more of its business now comes from recurring communication services, which have very high margins and do not require much reinvestment. Even though equipment sales fell, the growth in these subscription revenues meant that a larger share of sales turned into cash. At the same time, the slowdown in hardware demand reduced the need to carry as much inventory, which further supported cash generation. Altogether this led to record operating cash flow and the strongest free cash flow margin in the company’s history. This level of cash flow is likely to continue because recurring revenues are still growing at double-digit rates and now make up almost half of total sales. Since these revenues require very little additional investment, they should keep driving strong free cash flow in the future, even if hardware sales remain more cyclical. Management has also shown that it wants to share this cash flow with shareholders. In fiscal 2025, Napco paid out $13,6 million in dividends and bought back $36,8 million of its stock, equal to 1,2 million shares. The company has already raised its dividend several times in recent years and has signaled there is room to raise it further. Buybacks are handled more opportunistically, but management has made it clear they remain on the table. With a strong balance sheet and growing cash flow, Napco is in a good position to continue rewarding shareholders while still investing in growth. Napco usually trades at a low free cash flow yield, which reflects a high valuation. Right now, however, the company is trading at its highest free cash flow yield since fiscal year 2016, suggesting that while the shares are not cheap, they are at their most attractive valuation in many years. We will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. A common way to assess whether a company’s debt is manageable is to divide total long-term debt by earnings to see if it could be repaid within three years. In the case of Napco Security Technologies, this calculation does not apply because the company has no debt. Ending the fiscal year with around $100 million in cash and zero debt gives Napco significant financial flexibility. Management has also emphasized that they intend to keep the business debt-free while still returning capital to shareholders through dividends and buybacks.

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Risks

Macroeconomic factors is a risk for Napco because demand for its products is closely tied to the health of the broader economy. In periods of economic weakness or uncertainty, businesses, schools, governments, and homeowners may choose to delay, scale back, or cancel security system purchases and installations. This directly affects Napco’s equipment sales, which are still a significant part of revenue, even as recurring services grow. Economic downturns can also strain the finances of Napco’s distributors, dealers, and installers. If these partners face cash flow issues or go out of business, Napco could experience lower sales, more payment delays, or even bad debt. Geopolitical tensions and conflicts add another layer of risk. They create uncertainty in financial markets and can weigh on customer confidence, leading to slower investment in security infrastructure. In addition, tariffs have already had an impact on Napco by raising costs and creating uncertainty for both the company and its customers. These pressures can dampen demand for hardware products such as locks and access systems, as seen recently when distributors reduced inventory in response to tariff concerns. In a prolonged downturn, many of the independent distributors, dealers, and installers that Napco relies on could struggle to stay in business. These partners depend heavily on activity in areas like new construction and renovation, which tend to slow when the economy weakens. If fewer buildings are being constructed or upgraded, there is less demand for new security systems, which means less work for Napco’s dealer network. Some of these businesses might even close or cut back their operations, reducing Napco’s ability to get its products into the hands of end customers. Because Napco does not sell directly at scale and depends on this network to reach most of its customers, a shrinking dealer base would limit its growth opportunities and make it harder to win new business.

Competition is a risk for Napco because the security products market is crowded with many players, including companies that are much larger and better funded. Napco competes with around a dozen other firms in the U.S. that also manufacture and sell security equipment. Many of these competitors can spend more on research, development, and marketing, which means they may be quicker to bring new technologies to market or more aggressive on pricing. If competitors launch products with more advanced features, better integration, or lower costs, Napco risks losing market share. While Napco has an advantage in offering a broad range of products under one roof, including intrusion alarms, fire systems, access control, locking devices, and connectivity, larger rivals could still pressure margins by undercutting prices or leveraging their bigger sales and support networks. The industry also evolves quickly, with constant improvements in technology. Napco invests about 5–8% of its annual revenue in research and development, but some competitors commit far more resources, which could allow them to outpace Napco in innovation. Another challenge is that Napco relies heavily on independent distributors and dealers. If competitors are able to offer better terms, stronger technical support, or easier-to-integrate systems, those partners might shift business away from Napco. In addition, the announcement or release of new products by competitors can slow Napco’s sales cycle, as customers may wait to compare options.

Accounting integrity is a risk for Napco. In 2023, the company admitted to significant accounting errors and had to restate its earnings for three quarters. This was a serious event that immediately caused the stock to fall by about 40% and damaged investor confidence. When a company has to restate results, it raises concerns that management either did not have proper controls in place or was not being transparent. In Napco’s case, t he errors created doubts about whether investors could fully trust the numbers being reported. The problem did not stop there. Allegations from former employees later surfaced, suggesting that income may have been inflated, inventory misstated, and that insider selling practices were questionable. Whether or not all of these claims prove accurate, they added to the sense that Napco’s financial controls and governance had been weaker than expected. For a public company, this kind of uncertainty can be damaging because it makes investors more cautious and can even expose the business to lawsuits or regulatory scrutiny. To rebuild trust, Napco replaced its auditor with Deloitte & Touche and brought in outside consultants to improve its reporting systems and internal checks. In fiscal 2025, Deloitte gave the company a clean opinion under the Sarbanes-Oxley Act, stating that Napco’s internal controls over financial reporting were properly designed and working effectively. This is a positive step forward, but trust in financial reporting is not rebuilt overnight. Investors may remain watchful for years, since once accounting credibility has been questioned, the risk of reputational damage lingers. The main concern is that if another accounting problem were to occur, it could have an outsized impact on Napco. It would likely harm its reputation, put more pressure on the share price, and make it harder to attract investors who value transparency and strong governance. While recent actions suggest Napco is taking the issue seriously, accounting integrity remains a key risk because of the company’s history and the importance of investor trust in supporting long-term value.

Reasons to invest

Recurring services is a reason to invest in Napco. Over the past decade, the company has transformed its business model from being primarily hardware-driven to one that is increasingly anchored in subscription-based revenues. These services, mainly generated through its StarLink line of cellular radios, now represent nearly half of total sales and continue to grow at double-digit rates. In fiscal 2025 alone, recurring revenue grew by more than $10 million and reached a run rate of $94 million, the highest in company history. What makes this revenue so attractive is its profitability and stability. Recurring services carry gross margins of about 91%, far higher than margins on equipment sales. Once installed, each StarLink device generates ongoing monthly fees that require little additional cost to support, turning them into a reliable cash engine for the company. The StarLink Fire radio platform in particular has become an industry standard in commercial fire alarm systems, helping Napco capture more accounts that provide long-term recurring revenue streams. Another strength of this model is that it makes Napco’s earnings less sensitive to economic fluctuations. While hardware sales can rise or fall depending on construction activity or distributor demand, the need for ongoing alarm monitoring and fire safety compliance is non-discretionary. Regulatory shifts away from copper landlines and toward cellular communications have further reinforced demand for Napco’s radios, ensuring that recurring revenues should keep expanding. This combination of growth, high margins, and predictability makes recurring services the cornerstone of Napco’s financial performance. It provides consistent cash generation, supports reinvestment in new products, and gives the company flexibility to return capital to shareholders. As recurring services grow beyond 50% of total revenue, they are expected to further strengthen Napco’s profitability, cash flow, and resilience, making them a compelling reason to invest in the company.

School security is a reason to invest in Napco. The company has built a strong position in this market by offering a full suite of solutions that combine door locks, access control, and alarm technologies into one integrated platform. This makes Napco especially well suited for schools, which need reliable, easy-to-use, and scalable systems to protect students and staff. Its products range from standalone locks that teachers can operate in emergencies to enterprise-scale systems that allow administrators to secure an entire campus at once. Importantly, these platforms are aligned with recognized standards like PASS, giving schools confidence that they are adopting best-in-class solutions. The demand for school safety is both urgent and long-term. Rising concerns over school shootings and other security threats have pushed many states and districts to expand their security budgets. Mandates such as Alyssa’s Law, which requires panic and alarm systems in schools, create structural tailwinds that drive adoption of Napco’s technologies. Even well-funded institutions are still in the process of upgrading, highlighting how much opportunity remains. With over 100.000 K-12 schools and thousands of colleges, universities, and houses of worship in the U.S. alone, the market is large and far from fully addressed. What makes this area of the business particularly attractive is its resilience. Unlike some commercial projects that can be delayed during economic downturns, investments in school safety are often non-discretionary and supported by government funding. Napco’s reputation as a trusted partner to school districts across the country positions it to capture a growing share of this spending. As schools continue to prioritize safety, and as regulations and funding programs expand, Napco is well placed to benefit from steady, long-term demand. The combination of social importance, regulatory support, and large untapped opportunity makes school security a meaningful growth driver.

Innovation is a reason to invest in Napco. The company has made research and development a central part of its strategy, not just to improve existing products but to create entirely new sources of recurring revenue. One example is the launch of its MVP platform, a next-generation cloud-based access control system that integrates directly with Napco’s locking hardware. By moving access control to the cloud, MVP eliminates the need for on-site servers, making it easier for dealers to install and maintain while providing end customers with real-time information on building access. This creates a new recurring revenue stream for both Napco and its dealers and opens the door to adoption by large enterprises as well as smaller facilities. Napco is also expanding beyond MVP with a pipeline of new recurring-revenue products across radios, fire systems, and locking devices. The company’s goal is to ensure that nearly every new product has a built-in service component, which not only strengthens dealer loyalty but also steadily increases the share of high-margin recurring revenues. Dealers value these innovations because they simplify installation, improve reliability, and provide new opportunities to generate service income, which in turn makes Napco’s platform more attractive compared to competitors. What makes Napco’s innovation strategy particularly compelling is its focus on combining hardware expertise with cloud-based services. This integration gives customers more functionality and flexibility while securing long-term subscription revenue for Napco. For example, in hospitals or schools, administrators can instantly track who enters certain areas, receive real-time alerts, and adjust access remotely, all through Napco’s cloud system. As these innovations roll out and adoption grows, Napco not only deepens its competitive moat but also ensures that its revenue mix continues shifting toward higher-margin, more predictable streams.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,19, which is from the fiscal year 2025. I have chosen a projected future EPS growth rate of 15%. (Finbox expects EPS to grow by 14,9% annually over the next five years. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on Napco Security Technologies' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $35,70. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Napco Security Technologies at a price of $17,85 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 54, and capital expenditures were 2. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 1 in our calculations. The tax provision was 7. We have 35,7 outstanding shares. Hence, the calculation will be as follows: (54 – 1 + 7) / 35,7 x 10 = $16,80 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Napco Security Technologies' free cash flow per share at $1,44 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $27,25.

Conclusion

I find Napco Security Technologies to be an intriguing company with strong management. Its moat is built on the breadth of its integrated product ecosystem, and it has consistently achieved high ROIC, reaching record levels in the past two years. Free cash flow and free cash flow margin also hit record highs in fiscal 2025. Macroeconomic factors remain a risk because weaker economic conditions, tariffs, or geopolitical uncertainty can reduce demand for security equipment and strain the distributors and dealers the company depends on. While recurring services provide stability, a prolonged downturn could still shrink this network and limit hardware growth. Competition is another risk as Napco faces larger, better-funded rivals that can outspend it on research, development, and marketing, allowing them to launch new technologies faster or at lower prices. If competitors gain an edge in innovation, pricing, or dealer relationships, Napco could lose market share and face margin pressure. Accounting integrity is also a risk because past accounting errors and restated earnings damaged investor confidence and highlighted weaknesses in internal controls. Although the company has since improved oversight and received a clean audit opinion, trust takes time to rebuild and any future issues could have a serious impact on its reputation, valuation, and ability to attract investors. On the positive side, recurring services are a compelling reason to invest, as they now represent nearly half of total sales, are growing at double-digit rates, and generate gross margins of about 91%, far higher than hardware. This predictable, high-margin revenue stream strengthens cash flow, reduces exposure to economic cycles, and supports long-term shareholder returns. School security is another driver, as rising safety concerns, government mandates, and dedicated funding continue to fuel long-term demand. With its integrated platform of locks, access control, and alarms, Napco is well positioned to capture a large market that remains far from fully addressed. Innovation further supports the case, with the launch of its cloud-based MVP platform and ongoing expansion of recurring-revenue products across radios, fire systems, and locks. By combining hardware expertise with cloud services, Napco increases customer value while growing its base of high-margin, recurring revenues. Overall, I believe Napco is an appealing company and that buying a small position at the Payback Time price of $27 could offer an attractive risk/reward for the long-term investor.

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