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Allegion: Inorganic Plans Drive Growth, Currency Woes Persist


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On Sep 27, we issued an updated research report on Allegion plc (ALLE - Analyst Report) - a leading global provider of security products and solutions for business and domestic purposes.

The company’s share price rose 7.4% so far this year. Allegion also reported positive earnings surprises in three out of the last four quarters, with an average beat of 11.58%.

The company’s first-half 2016 results were quite impressive, courtesy of higher earnings, margins and revenues driven by acquisitions and organic growth. All the regions, barring Asia Pacific, reported strong profits driven by a stable market, investment in new products and channel strategies.

Buyouts: Key Growth Driver

Acquisitions form an important part of Allegion’s growth strategy. The security products industry is highly fragmented, particularly in the developing markets, and involves the use of emerging technology products that employ newer technologies. This creates numerous opportunities for the company to broaden its product portfolio as well as geographic footprint.

In Jun 2016, Allegion acquired Germany-based safety and security provider, Trelock GmbH and related companies. Trelock manufactures branded bicycle locks, lights and electronic control units which enjoy strong demand across Europe and Asia. This buyout will complement Allegion’s Kryptonite and AXA brands in the U.S. and the bicycle markets in Europe.

Apart from the inorganic drive, overall fundamentals of the housing market should remain positive through 2016 and should bode well for Allegion as well. Steady job and wage growth, a recovering economy, moderating home price gains, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory – all point to continually strong demand in 2016. Allegion has a wide exposure to the U.S. residential sector, especially in the commercial and residential construction and remodeling markets, and its revenues are expected to increase with the gradual recovery in the housing market and strength in consumer spending patterns.

Currency: A Drag

Allegion remains susceptible to currency exchange fluctuations due to its wide global footprint. Roughly 25% of the company’s 2015 net revenue was derived from outside the U.S., which is expected to increase, going ahead. Thus, the strong dollar will continue to hurt the company’s international earnings. Additionally, we are aware of the slowing economic growth in China, which may hurt Allegion as it has a considerable presence in the country. Moreover, the Eurozone economy is still sluggish and the outlook for 2016 remains clouded.

Allegion also pointed out that earnings are expected to be under pressure in the second half of 2016 due to inflation, second-half weighted investments and a higher-than-expected tax rate.

Zacks Rank & Other Key Picks

Allegion currently carries a Zacks Rank #2 (Buy).

Other well-placed stocks in the same space include Brady Corp. (BRC - Snapshot Report) , Lakeland Industries Inc. (LAKE - Snapshot Report) and Alarm.Com Holdings, Inc. (ALRM - Snapshot Report) .

Full-year fiscal 2017 earnings for Brady will likely increase 6.2%. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alarm.Com also sports a Zacks Rank #1 while its full-year 2016 earnings is expected to increase by 203.3%.

Lakeland Industries’ – a Zanks Rank #2 company – full-year fiscal 2017 earnings are expected to decrease 47.7%.

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