We issued an updated research report on Fortune Brands Home & Security, Inc. (FBHS - Free Report) on Mar 6. Strengthening segmental business, focus on acquisition, and product development and healthy rewards to shareholders will work in its favor. However, industry competition, and rising costs and expenses remain prime concerns.
The company, with a market capitalization of approximately $9.5 billion, currently carries a Zacks Rank #3 (Hold).
Below, we have briefly discussed the company’s potential growth drivers and possible headwinds.
Factors Favoring Fortune Brands
Solid Business Portfolio: A well-diversified business structure has given Fortune Brands a competitive edge over some players in the industry. The company currently operates through four business segments — Cabinets, Plumbing, Doors and Security — largely minimizing its risks of loss from the poor performance of any group. Also, a vast customer base in various end markets is a boon.
In 2018, the company anticipates Cabinets sales to increase in the mid-single-digit range. Sales in the Doors segment are estimated to increase in the high-single-digit to low-double-digits on the back of new products and retail expansion. Security sales are predicted to increase in mid-single digit. Growth opportunities are bright in international and commercial markets. Plumbing segment is likely to benefit from new brand additions in the Global Plumbing Group.
Impressive Top- and Bottom-Line View for 2018: Fortune Brands delivered better-than-expected results in the last quarter of 2017, pulling off a positive 1.3% earnings surprise. The outlook for 2018 also looks bright, with positive momentum in the U.S. housing market anticipated to be the prime driving catalyst. The Home products market in the country is projected to grow 5-7% in the year, while the global market is expected to be up 5-6%.
Fortune Brands anticipates its sales growth to be in the band of 6-7% in 2018, while earnings (before charges/gains) are projected to be in the range of $3.54-$3.66 per share. The bottom line forecast reflects 17% mid-point growth over the year-ago figure and it includes the positive impact of lower taxes for corporates.
These positive sentiments are clearly reflected in the positive revisions in earnings estimates for the stock. In the last 60 days, seven brokerage firms have raised estimates for 2018, while three firms have increased estimates for 2019. Currently, the stock’s Zacks Consensus Estimate is pegged at $3.63 for 2018 and $4.04 for 2019, representing growth of 4.6% and 4.7% from their respective tallies 60 days ago.
Capital Allocation Strategies: Fortune Brands follows sound capital allocation strategies, under which it makes meaningful acquisitions for business expansion, invests for the development of new products and the improvement of services, and rewards shareholders handsomely.
Brands like Shaws of England and Victoria + Albert were acquired by the company in 2017. These assets are anticipated to generate combined revenues of $45 million annually. Also, the company remains on track to generate roughly $2.5 billion revenues from its Plumbing business by 2020.
In addition, the company is committed toward returning value to shareholders. In 2017, the company used $214.8 million to purchase treasury stocks, while paid dividends of $110.3 million. In December 2017, the company hiked its quarterly cash dividend by 11% and also announced a $250 million share buyback program.
Factors Working Against Fortune Brands
Share Price Performance and Poor Valuation: Last month, Fortune Brands’ shares have declined 0.4%, underperforming 2% growth recorded by the industry.
Also, on a P/E (TTM) basis, the company’s shares look overvalued compared with the industry with respective tallies of 20.2x and 13.7x in the last month. This makes us cautious about the stock.
Rising Costs & Expenses, Huge Debts Raise Concerns: Fortune Brands is exposed to risks emanating from rise in costs and expenses. In the fourth quarter of 2017, its cost of sales before charges/gains grew 7% year over year while selling, administrative, and research and development expenses before charges/gains increased 3.1%. Also, its long-term debt was approximately $1.5 billion while exiting the quarter. We believe, if unchecked, rising costs and expenses, and huge debt levels can be detrimental to the company’s profitability in the quarters ahead.
Threat From International Expansion & Industry Competition: Expansion of business in international arenas has exposed Fortune Brands to risks arising from adverse movements in foreign currencies. Also, uncertainties in the economic growth of the countries served can severely impact the company’s businesses.
Moreover, the company faces stiff competition from companies offering similar products and services or those producing different items for same uses. Also, difficulties or delays in research and development or production and services, apart from the failure of new products and technologies in the market, might hurt the company’s competitive edge.
Some key players in the industry are Allegion plc (ALLE - Free Report) , Alarm.com Holdings, Inc. (ALRM - Free Report) and Brady Corporation (BRC - Free Report) . While Allegion sports a Zacks Rank #1 (Strong Buy), both Alarm.com Holdings and Brady carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
In the last 60 days, earnings estimates for each of these stocks have improved for the current year and the next year. Also, average positive earnings surprise for the last four quarters was 8.72% for Allegion, 55.94% for Alarm.com Holdings and 3.88% for Brady.
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