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Here's Why You Should Hold on to Fortune Brands (FBHS) Stock

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We issued an updated research report on Fortune Brands Home & Security, Inc. (FBHS - Free Report) on Sep 5. Strengthening home products market as well as potential benefits from strategic initiatives and synergistic benefits from acquisitions will prove advantageous for the company. However, headwinds related to international operations, rising costs and high debt levels might restrict its growth momentum in the near term.

It currently carries a Zacks Rank #3 (Hold).

In the last six months, Fortune Brands’ shares have yielded a return of 8.2%, outperforming roughly 0.2% decline of the industry.



Despite the outperformance, the stock looks overvalued compared with the industry on a P/E (TTM) basis, with respective tallies of 21.3x and 16.4x in the same time frame.

Growth Drivers

Strategic Initiatives: Fortune Brands remains committed toward making investments for the development of new products and improving its services. The company formed the Global Plumbing Group, a strategic platform in 2016. The group has helped in accelerating growth opportunities in the company’s plumbing business. Also, new products launched by the company’s premium brands like MasterBrand Cabinets, Moen and Master Lock, will enable it to expand market share.

Inorganic Growth: Acquiring meaningful businesses have helped Fortune Brands to expand its product offerings and in turn, its profitability. Notably, the company acquired Canada-based premium showroom brand, Riobel and California-based luxury brand, ROHL in 2016. We believe that these assets, with collective revenue generating capacity of $110 million, will prove beneficial in the quarters ahead.

Shareholders’ Return and Promising ’17 Guidance: Share buybacks and dividend payments are the prime means of returning value to shareholders. Fortune Brands initiated $300 million worth share buyback program in March 2016 while in December, it hiked the quarterly dividend rate by 13%. In the first half of 2017, the company used $32.7 million to purchase treasury stocks while paid dividends of $55.3 million.

For 2017, the company anticipates the U.S. home products market to grow 6-7% while predicts the global market to rise 5-6%. Sales growth is anticipated to be in a band of 6-8% in the year. Seeing positive momentum throughout the year, the company revised its earnings guidance to $3.04-$3.12 per share from the earlier projection of $3.00-$3.12, increasing the mid-point to $3.08 from $3.06 predicted earlier.

Headwinds Marring Fortune Brands’ Growth Prospects

Diversification Woes: We believe Fortune Brands’ geographical expansion has exposed it to risks arising from foreign currency movements and geopolitical issues. Notably, the company derived roughly 15% of its net sales in 2016 from international operations. Uncertainties in the economic growth of the countries served or weakness in housing market activities will severely impact its businesses. Additionally, due to wide diversity of its products and the vastness of the markets it serves, the company faces stiff competition.

Rising Costs and Debt Levels: Over time, Fortune Brands’ profitability suffered from higher costs and expenses. For instance, in the first six months of 2017, the company’s cost of sales grew 4.4% from the year-ago period while operating expenses rose 6.1%. Another issue currently faced by the company is its huge debt level, which was approximately $1.4 billion at the end of second-quarter 2017. We believe that, if unchecked, higher costs and operating expenses as well as rising debt levels will prove detrimental to its profitability.

Others: In addition to the above-mentioned headwinds, we believe that failure of new products in the market and difficulties or delays in research and development may hurt the company’s competitive position. Also, sudden inflation in the raw material prices or supply shortage can hamper the company’s production process and thus, dent its margins.

Stocks to Consider

Fortune Brands currently has $9.7 billion market capitalization. We believe that the above-mentioned positives and negatives clearly justify the stock’s Zacks Rank of 3.

Some stocks worth considering in the same space are Pointer Telocation Ltd. (PNTR - Free Report) , Allegion PLC (ALLE - Free Report) and Brady Corporation (BRC - Free Report) . While Pointer Telocation sports a Zacks Rank #1 (Strong Buy), both Allegion PLC and Brady Corporation carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Pointer Telocation’s Zacks Consensus Estimate for 2017 was revised upward in the last 60 days. Also, the company’s average earnings surprise for the last four quarters was a positive 59.36%.

Allegion PLC’s Zacks Consensus Estimate for 2017 and 2018 improved over the past 60 days. Also, the company delivered better-than-expected results in second-quarter 2017, with a positive earnings surprise of 11.00%.

Brady Corporation’s average earnings surprise for the last four quarters was a positive 14.02%.

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