What Happened?

Shares of security systems manufacturer Napco (NASDAQ:NSSC) jumped 8.8% in the morning session after the company reported impressive third quarter 20225 results as sales, earnings, and EBITDA all exceeded Wall Street expectations. The company reported solid gains in service sales, which rose 11% and now make up about half of all sales. With more of these high-markup services in the mix, gross margin improved. 

On the other hand, equipment sales dropped, falling by almost a quarter, driven by lower orders from three key distributors: two managing bloated inventories and a third hit by project timing delays. In short, the quarter was mixed yet decent, with early signs the business is trying to pivot to a more stable model.

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What The Market Is Telling Us

Napco’s shares are somewhat volatile and have had 14 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The biggest move we wrote about over the last year was 3 months ago when the stock dropped 28.2% on the news that the company reported weak fourth quarter results. Its revenue missed significantly, and its EBITDA fell short of Wall Street's estimates. The weak performance was attributed to reduced equipment sales to two large distributors. The first distributor is pulling back on all purchases from NSSC to reduce overall inventory levels, and the second distributor is going through a management restructuring. Overall, this was a weaker quarter.

Napco is down 27.3% since the beginning of the year, and at $25.46 per share, it is trading 56.1% below its 52-week high of $58 from August 2024. Investors who bought $1,000 worth of Napco’s shares 5 years ago would now be looking at an investment worth $2,350.

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