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Fortune Brands (FBHS) Exhibits Solid Prospects, Risks Remain

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Fortune Brands Home & Security, Inc. stands to benefit from strength in the U.S. housing market, supported by expected new construction growth and product launches. The company has been witnessing strong momentum in its plumbing business, backed by the growing popularity of its brands. Robust demand for the company’s doors and decking products and strength in its security business are also likely to drive its performance in the coming quarters. For 2021, it expects sales growth of 23-25% on a year-over-year basis, higher than the previously mentioned 20-22%.

The company intends to solidify its product portfolio and leverage business opportunities through the addition of assets. In the first half of 2021, it used $5.2 million (net of cash acquired). In December 2020, Fortune Brands acquired LARSON Manufacturing, which has enhanced its outdoor living product offering in the doors and decking market. In the first and second quarters of 2021, the LARSON buyout expanded the Outdoors & Security segment’s sales by 32% and 35%, respectively.

Fortune Brands believes in rewarding shareholders handsomely through dividend payments and share buybacks. In the first half of 2021, it paid out dividends of $72 million and bought back shares worth $156 million. In December 2020, it also raised the quarterly dividend rate by 8%. The company’s focus on operational efficiency and cost-control measures might also help it in maintaining a solid margin performance in the quarters ahead.

However, escalating costs and expenses pose a major concern. In 2020 and second-quarter 2021, the company’s cost of sales increased 38% and 24%, respectively, on a year-over-year basis. Its selling, general and administrative expenses recorded a year-over-year increase of 43% and 18% in 2020 and second-quarter 2021, respectively.

Its high-debt profile is also a major issue. Exiting the second quarter, Fortune Brands’ long-term debt balance was $2,608.3 million, reflecting a 1.4% increase from 2020-end. Any further increase in debt levels can raise the company’s financial obligations and hurt profitability.

The company faces stiff competition from several of its peers in the industry like Allegion plc (ALLE - Free Report) , American Woodmark Corporation (AMWD - Free Report) , and InSinkErator business of Emerson Electric Co. (EMR - Free Report) .


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