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Allegion Gains From Solid Product Demand Despite High Costs

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We issued an updated research report on Allegion plc (ALLE - Free Report) on Dec 3.

This security and safety services provider currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $8.7 billion.

A few growth drivers and certain headwinds, which might influence Allegion, have been discussed below.

Factors Favoring Allegion

Solid Financial Performance & Bottom-Line Outlook: Allegion pulled off a positive earnings surprise of 4.79% in the last four quarters. This includes the impact of 1.65% earnings beat recorded in the third quarter of 2018. Bottom-line results in the quarter gained from sales growth, increased productivity, cost-saving moves and lower taxes.

For 2018, Allegion anticipates gaining from stronger revenues, acquired assets, ongoing pricing actions and greater operational efficacy. Earnings per share are now anticipated to be $4.43-$4.50 versus the earlier $4.35-$4.50. The mid-point now stands at $4.47, up from $4.43.

Solid Revenue Growth Potential: Allegion works diligently to provide better security solutions to its large customer base and improvise channel strategies. For 2018, the company anticipates investing 15 cents per share for promoting its electronics products in North America and the development of products.

For 2018, Allegion anticipates strengthening residential and non-residential businesses, solid demand for electronic products, and acquired assets to favor top-line growth. Revenues are anticipated to grow 13-13.5% in the year versus 12.5-13.5% mentioned earlier. Organic sales will be 5-5.5%, up from the previous prediction of 4-5%.

Share Price Performance and Earnings Estimate Revision: In the past three months, Allegion’s shares have yielded 5.1% return against 10% decline recorded by the industry.



This share price performance includes the impact of positive sentiments for the stock after the company reported third-quarter results on Oct 25, 2018. The stock gained nearly 10.4% since that date, outperforming 2.7% growth recorded by the industry.

Moreover, the solid performance and impressive outlook made brokerage firms optimistic about the company’s growth prospects. In the past 60 days, earnings estimates on the stock for 2018 have been increased by four brokerage firms. Additionally, estimates for 2019 were increased by three firms and lowered by two. Currently, the Zacks Consensus Estimate for earnings is pegged at $4.49 for 2018 and $4.93 for 2019, reflecting growth of 0.4% and 0.6% from respective 60-day-ago tallies. Further, bottom-line estimates represent year-over-year growth of 13.4% for 2018 and 9.8% for 2019.

Allegion PLC Price and Consensus

 

Allegion PLC Price and Consensus | Allegion PLC Quote

The company’s earnings in the next three to five years are projected to grow 12.8%.

Factors Working Against Allegion

Poor Valuation: On a Price-to-Earnings (P/E) basis, Allegion currently appears overvalued compared with the industry. The stock currently has a trailing 12-month P/E multiple of 20.9, which is way higher the industry’s 17.5 and its own median level (for the last three months) of 20.5.

This overvaluation compared with the industry is making us cautious about Allegion’s stock.

Adversities Arising From Rising Costs: Over time, higher cost of sales has been an issue for Allegion. Between 2013 and 2017, the company’s cost of sales grew at CAGR of 2.1%. Also, a hike of 3.8% was recorded in selling and administrative expenses. In the first nine months of 2018, cost of sales increased 12.6% year over year while selling and administrative expenses expanded 9.1%. Inflation in material costs is believed to be a prime reason behind the hike in the cost of sales.

We believe that higher costs and expenses, if unchecked, are likely to hurt margins and profitability.

Others: Geographical diversification is reflective of a flourishing business of Allegion. However, this diversity exposed the company to headwinds, arising from geopolitical issues and unfavorable movements in foreign currencies.
 
Stocks to Consider

Some better-ranked stocks in the industry Zacks Industrial Products sector are Ituran Location and Control Ltd. (ITRN - Free Report) , Brady Corporation (BRC - Free Report) , and Flowserve Corporation (FLS - Free Report) . While Ituran Location and Control currently sports a Zacks Rank #1 (Strong Buy), both Brady and Flowserve carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
    
In the past 60 days, earnings estimates for each of these stocks improved for the current year. The earnings surprise was a positive 30.43% for Ituran Location and Control, 9.43% for Brady, and 16.67% for Flowserve.

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