Napco (NSSC)

Security systems manufacturer Napco (NASDAQ:NSSC) announced better-than-expected revenue in Q3 CY2025, with sales up 11.7% year on year to $49.17 million. Its GAAP profit of $0.34 per share was 11.1% above analysts’ consensus estimates.

Company Overview

Protecting everything from schools to government facilities since 1969, Napco Security Technologies (NASDAQ:NSSC) manufactures electronic security devices, access control systems, and communication services for intrusion and fire alarm systems.

Companies in this sector, especially if they invest wisely, could see demand tailwinds as the world moves towards more IoT (Internet of Things), automation, and analytics. Enterprises across most industries will balk at taking these journeys solo and will enlist companies with expertise and scale in these areas. However, headwinds could include rising competition from larger technology firms, as digitization lowers barriers to entry in the space. Additionally, companies in the space will likely face evolving regulatory scrutiny over data privacy, particularly for surveillance and security technologies. This could make companies have to continually pivot and invest.

Napco Security Technologies competes with larger security equipment manufacturers like Honeywell International (NASDAQ: HON), Johnson Controls (NYSE: JCI), and Allegion (NYSE: ALLE), as well as specialized security technology providers such as Alarm.com (NASDAQ: ALRM).

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $186.8 million in revenue over the past 12 months, Napco is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, Napco grew its sales at an exceptional 13.7% compounded annual growth rate over the last five years. This is an encouraging starting point for our analysis because it shows Napco’s demand was higher than many business services companies.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Napco’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.2% over the last two years was well below its five-year trend.

This quarter, Napco reported year-on-year revenue growth of 11.7%, and its $49.17 million of revenue exceeded Wall Street’s estimates by 4.8%.

Looking ahead, sell-side analysts expect revenue to grow 8.6% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and indicates its newer products and services will fuel better top-line performance.

Napco has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average operating margin of 21.9%.

Analyzing the trend in its profitability, Napco’s operating margin rose by 10.2 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q3, Napco generated an operating margin profit margin of 27.7%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Napco’s EPS grew at an astounding 42.4% compounded annual growth rate over the last five years, higher than its 13.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Napco’s earnings to better understand the drivers of its performance. As we mentioned earlier, Napco’s operating margin was flat this quarter but expanded by 10.2 percentage points over the last five years. On top of that, its share count shrank by 2.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Napco, its two-year annual EPS growth of 6.7% was lower than its five-year trend. This wasn’t great, but at least the company was successful in other measures of financial health.

In Q3, Napco reported EPS of $0.34, up from $0.30 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Napco’s full-year EPS of $1.23 to grow 10.2%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Napco has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 18.6% over the last five years.

Taking a step back, we can see that Napco’s margin expanded by 10.1 percentage points during that time. This is encouraging because it gives the company more optionality.

Napco’s free cash flow clocked in at $11.44 million in Q3, equivalent to a 23.3% margin. The company’s cash profitability regressed as it was 2.5 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Napco’s five-year average ROIC was 42.3%, placing it among the best business services companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Napco’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Napco is a profitable, well-capitalized company with $105.8 million of cash and $5.30 million of debt on its balance sheet. This $100.5 million net cash position is 6.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Napco beat analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 2.9% to $45.36 immediately following the results.

Updated: December 4, 2025 at 10:14 PM EST

When considering an investment in Napco, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There is a lot to like about Napco. First of all, the company’s revenue growth was exceptional over the last five years. And while its subscale operations give it fewer distribution channels than its larger rivals, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, Napco’s impressive operating margins show it has a highly efficient business model.

Napco’s P/E ratio based on the next 12 months is 29.5x. There’s some optimism reflected in this multiple, but we don’t mind owning a high-quality business, even if it’s slightly expensive. It’s often wise to hold investments like this for at least three to five years, as the power of long-term compounding negates short-term price swings that can accompany relatively high valuations.

Wall Street analysts have a consensus one-year price target of $48.83 on the company (compared to the current share price of $40.96).