Why NAPCO Security Technologies Shares Are Diving Today

Needham analyst James Ricchiuti reiterated a Buy rating on NAPCO Security Technologies, Inc. NSSC, lowering the price target to $30 from $39. 

NAPCO released Q4 preliminary results on Friday and revealed it would restate the prior three-quarters of FY23 due to cost-accounting errors that will impact the nine-month EPS by ~$0.26.

The restatement lowers the 9-month GAAP net income by $9.5 million, or around 36% from the previously reported financials. Revenues are unaffected by the restatement.

The restatement, which NSSC said was the result of overstated gross margins due to errors discovered in the costs of several components in inventory, has not affected cash flow or NSSC’s cash position, the analyst notes.

Based on the above issues, the analyst expects NSSC to be in the penalty box for some time.

NAPCO expects Q4 revenues to be $44.7 million, about 7% below consensus and up 3% Y/Y. The analyst notes that the decline indicates a build-up of Starlink radios in the channel that now has to be worked off. However, the Q4 revenue miss is an inventory de-stocking issue rather than a structural change in the business, the analyst adds.

The company expects net income for Q4 in the range of $10 million-$11 million, compared with a consensus of $10.1 million. The analyst thinks Q4 net income to have met consensus expectations owing to a strong contribution from the school security business, which has higher gross margins than other parts of the hardware business, notably radios. 

The company expects to report fourth quarter and fiscal year-end results on or about August 28, 2023.

Price Action: NSSC shares are trading lower by 46.3% to $20.61 on the last checked Monday.