NAPCO SECURITY TECHNOLOGIES, INC (NSSC) stock intrinsic value fair value estimate & owner earnings analysis

Napco Security Technologies makes electronic door locks (Alarm Lock and Marks USA), intrusion and fire-alarm panels, and access-control systems, and, most importantly, the StarLink cellular communicators that alarm dealers install so a building's fire or burglar alarm can signal a monitoring center without a telephone line. Each activated radio pays Napco a monthly service fee. That recurring service revenue reached $97.5 million in fiscal 2026 (the year ended June 30, 2026), up from $86.3 million in fiscal 2025 and $75.7 million in fiscal 2024. It earns roughly a 90% gross margin and now produces about three-quarters of the company's gross profit. Equipment sales of $104.8 million earned a 30.3% gross margin in fiscal 2026, against 23.6% in fiscal 2025, when tariffs on products from its Dominican Republic plant cut margins. Part of the 2026 improvement came from refunds of those tariffs after the February 2026 Supreme Court ruling, and that will not repeat. Owner earnings are operating cash flow with working-capital swings, stock compensation and maintenance-level capital spending removed. They were $1.33 a share in fiscal 2024, $1.18 in fiscal 2025 and $1.26 in fiscal 2026. The 2026 figure carries a $16.0 million charge to settle the shareholder class action over the company's reports from November 2022 to May 2023. Because that is a one-time cost, we add it back (about $0.35 a share after tax) when judging normal earning power, and instead deduct the settlement payment, net of tax, from cash on hand. We also remove interest earned on the cash pile, because the cash itself is counted separately. On that basis the business earned about $1.28, $1.09 and $1.52 a share in the last three years. We anchor on the median, $1.28, using only fiscal 2024 to 2026 because the business was much smaller before that: owner earnings per share more than doubled between fiscal 2023 and 2024. Normalized earnings grew about 39% in fiscal 2026 (7% as reported). The base case assumes about $1.45 a share in fiscal 2027, slightly below the 2026 level, because the equipment margin is set back to a mid-cycle level and the tariff refund does not recur. Napco has no debt. It held $137.6 million of cash and marketable securities at June 30, 2026. After the settlement payment of roughly $12.6 million after tax, the $5.4 million dividend already declared and $10 million kept for operations, about $109.6 million ($3.05 a share) is surplus. Base case ($31.08 a share): service revenue grows by about $9.5 million a year at first. That is below what the company actually added in each of fiscal 2023, 2025 and 2026 ($14.0, $10.6 and $11.2 million). The yearly additions taper to $3.5 million by year ten as the remaining alarm systems still on telephone lines are converted. Equipment gross profit is held at a mid-cycle $28 million and grows 2% a year from price increases. Operating expenses rise 4% a year, in line with recent increases, and taxes run at about 16%, close to recent effective rates. Earnings reach about $2.21 a share in year ten. They hold there for 15 years, supported by the installed base of radios still paying monthly fees, then fade to zero over the following decade. The business is worth about $28.03 a share. With no debt and $3.05 of surplus cash, the shares are worth about $31.08. Bear case ($17.44 a share): new activations slow sharply. Yearly service additions fall from $6 million to zero within five years as competing communicators take dealer share and the landline-conversion wave runs out. Equipment gross profit stays at the tariff-hit fiscal 2025 level of $22.5 million, and costs keep rising 4% a year. Earnings slide from about $1.26 a share to $0.98 by year ten, hold for ten years and then fade out over ten more. The business is worth about $14.39 a share, or $17.44 with the surplus cash. Bull case ($44.79 a share): dealers keep adding service revenue at the recent pace of about $11.5 million a year for the full decade. Equipment gross profit holds at the fiscal 2026 level of $31.8 million and grows 3% a year, backed by the price increases the company pushed through in 2026 (about 6% on locks and 9% on intrusion and access products). Earnings reach about $3.39 a share in year ten, hold for 20 years and then fade over ten. The business is worth about $41.74 a share, or $44.79 with the surplus cash. All cases are discounted at 6%. We gave no credit for new products, international expansion or margins above levels already achieved, because none of these is yet in evidence. Amortization of acquired intangibles is tiny ($0.3 million a year), so no adjustment for wasting assets was needed. What could make this wrong: most of the value depends on the radio service base continuing to grow. A slowdown in activations, a price war in communicators, or a cellular network change that strands installed radios would push value toward the bear case. New tariffs under other trade laws could again squeeze equipment margins. Earlier-year figures were revised in the fiscal 2022 annual report. Besides the settled class action, a derivative suit against current and former officers and directors was filed in November 2024. A few large customers account for a significant share of receivables. Our previous estimate put the base case at $39.20. The base and bull values are now lower because we no longer assume earnings keep growing forever after year ten; instead they hold and then fade. The bear case is slightly lower because it now uses the actual tariff-hit equipment margin of fiscal 2025. Partly offsetting this, the full fiscal 2026 results show stronger equipment margins and more surplus cash than we had before. The margin-of-safety price of $19.50 is about 37% below the base value. That margin reflects the cyclical, tariff-exposed equipment business and the fact that most of the value rests on continued radio activations. It sits modestly above the bear-case value.