We came across a bullish thesis on APi Group Corporation (APG) on Substack by Kairos research. In this article, we will summarize the bulls’ thesis on APG. APi Group Corporation (APG)’s share was trading at $36.96 as of Nov 12th. APG’s forward P/E was 17.61 according to Yahoo Finance.
A technician meticulously inspecting a corrosion-resistant insulation panel for a fire-protection system.
API Group, a leader in industrial services, has carved a strong niche in fire safety, primarily through targeted acquisitions and a strategic shift towards recurring, inspection-led revenue. Over the past decades, API has built a portfolio of around 100 niche businesses, primarily fire safety providers, which align with its recession-resistant model grounded in regulatory mandates, such as those from the National Fire Protection Association. This core fire safety segment contributes 70% of revenue, driven by recurring, high-margin inspections and monitoring services. Rather than pursuing large, cyclical contracts for new installations, API’s sales force focuses on winning recurring inspection services for existing buildings. This inspection-led approach not only secures ongoing revenue but also uncovers compliance issues that lead to additional services, offering a substantial revenue multiplier. For each dollar earned through inspections, API often generates an additional three to four dollars in follow-up services, all at a higher margin, which strengthens its bottom line. This model also allows API to selectively target high-margin specialty projects, further enhancing profitability.
Since going public in 2020, API has pursued an aggressive acquisition strategy, completing 25 acquisitions to bolster its fire safety portfolio. A recent high-profile purchase of Chubb, acquired at a premium valuation of 14x EBITDA, underscored API’s commitment to expanding its safety services. Typically, API seeks acquisitions with strong cultural fit and synergy potential, paying disciplined valuations in the 4x to 7x EBITDA range. By transitioning newly acquired businesses to its inspection-focused model, API optimizes margin performance across its portfolio. The company targets an EBITDA margin of 13% by 2025, with potential to expand to 15%, driven by recurring revenues that now make up 53% of sales. API aims for 10% organic growth in its inspection segment, with some investors advocating a divestment of its lower-margin specialty segment to concentrate on high-margin safety services.
API’s capital allocation strategies reflect its focus on quality revenue. The company has actively divested cyclical assets and lower-margin clients, creating a leaner revenue mix centered around high-margin fire safety. This approach has led to incremental margin gains, and with leverage reduced to a 2.4x net ratio, API has initiated a $1 billion share repurchase program, with $400 million still available. Despite a seemingly low return on invested capital (ROIC) due to goodwill and debt, API’s adjusted ROIC is closer to 7% and could improve as the safety segment grows. The company’s parallels with high-margin peers like Otis Worldwide and TopBuild suggest the potential for ROIC in the 10-20% range if capital allocation remains disciplined.
Risks to API’s growth include regulatory shifts in fire safety codes, which could affect inspection demand, although regulatory tightening is more probable than loosening. Cyclical pressures in the specialty services segment, which remains economically sensitive, may mask API’s underlying fundamentals. The Chubb acquisition offers growth potential but underscores the importance of prudent integration to avoid value erosion. Valuation projections indicate that the safety segment will continue to outpace specialty services, likely accounting for 81-83% of revenue by 2030, driven by bolt-on acquisitions and organic demand. Maintaining net debt below 2.5x EBITDA remains a priority as API balances growth with financial stability.
With an 18% upside, API offers compelling long-term returns, provided it maintains growth in its asset-light safety business. If API succeeds in sustaining demand for inspections and focusing on high-margin services, the company is well-positioned to deliver attractive returns for investors.
APi Group Corporation (APG) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 52 hedge fund portfolios held APG at the end of the second quarter which was 39 in the previous quarter. While we acknowledge the risk and potential of APG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than APG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.