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Fortune Brands (FBHS) Displays Solid Prospects, Risks Persist

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On Dec 30, we issued an updated research report on Fortune Brands Home & Security, Inc. (FBHS - Free Report) .

In the past six months, this Zacks Rank #3 (Hold) stock has returned 37.3% compared with the industry’s growth of 26.8%.

Present Scenario

Fortune Brands is witnessing strength in the U.S. housing market, supported by expected new construction growth and product launches. Also, strong momentum across its plumbing business, backed by a strong suite of brands and success of its category and channel expansion strategies, bodes well.

Moreover, consistent strength in the company’s Fiberon business (acquired in September 2018) is complementing its existing door brand — Therma-Tru — and enhancing growth opportunities in the outdoor living space. Further, the company’s buyout of LARSON Manufacturing (December 2020) is anticipated to solidify its foothold in the doors and decking space. Notably, Fiberon decking brand grew more than 40% in the third quarter of 2020.

Fortune Brands remains committed to rewarding shareholders handsomely through dividend payments and share buybacks. For instance, in the first nine months of 2020, the company repurchased shares worth $150 million and paid out dividends worth $99.9 million. In September 2020, its board of directors approved a $500-million share repurchase plan, which is valid till Sep 21, 2022. Further, in December 2020, it hiked its quarterly dividend rate by 8%.

However, the company is experiencing rising cost of sales over the past few quarters. Notably, in the third quarter, its cost of sales and its selling, general and administrative expenses jumped 14.6% and 5.5%, respectively, on a year-over-year basis. Further rise in costs might weigh on its margins and profitability in the quarters ahead.

In addition, its high-debt profile poses a major concern. Exiting third-quarter 2020, its long-term debt was high at $2,086.5 million. Any further increase in debt levels can raise the company’s financial obligations.

Key Picks

Some better-ranked stocks from the same space are Allegion plc (ALLE - Free Report) , Brady Corporation (BRC - Free Report) and Resideo Technologies, Inc. (REZI - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Allegion delivered a positive earnings surprise of 17.48%, on average, in the trailing four quarters.

Brady delivered a positive earnings surprise of 2.95%, on average, in the trailing four quarters.

Resideo delivered a positive earnings surprise of 212.23%, on average, in the trailing four quarters.

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