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

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We issued an updated research report on Fortune Brands Home & Security, Inc. (FBHS - Free Report) on Dec 26.

This security and safety service provider currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $5.1 billion.

Let’s delve deeper and discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Fortune Brands

Growth Through Buyouts: Over time, Fortune Brands easily penetrated unexplored markets, added products to portfolio and expanded geographical footprints with the help of acquired assets. In this regard, the buyout of Fiberon, LLC (in August 2018) is worth mentioning. The acquired assets will complement the company’s existing door brand — Therma-Tru. Further, it will help in enhancing its growth potential in outdoor living space. Earnings accretions of 5-6 cents per share in 2019 and 9-10 cents per share in 2020 are anticipated from the Fiberon buyout.

Shareholder-Friendly Policy: Fortune Brands effectively uses its cash flow to augment growth opportunities as well as reward shareholders handsomely. The company rewards its shareholders through dividend payments and share buybacks. In the first nine months of 2018, it used $87.1 million for paying dividends and approximately $603 million for repurchasing shares.

Recently, the company hiked its quarterly dividend rate by 10% — this being its 6th consecutive year of a dividend rate increase in double digits. Moreover, the company has share repurchase authorization of $505.7 million left from its $150-million and $400-million buyback programs approved in April and July 2018, respectively.

Long-Term Targets: Fortune Brands anticipates its Plumbing segment to contribute roughly 60% of the company’s revenues (in excess of $3 billion) by 2021. Its Cabinets, Doors and Security segments are predicted to contribute roughly 25% (roughly $3 billion), 10% (roughly $0.7 billion) and 5% (roughly $0.7 billion), respectively. Earnings per share are likely to grow to approximately $6.00 in 2021 from $3.08 in 2017.

Factors Working Against Fortune Brands

Woes From Rising Costs: Fortune Brands has been suffering from headwinds, arising from rising costs and expenses. In the first nine months of 2018, the company’s cost of sales increased 5.6% year over year and its operating expenses grew roughly 6%. It is worth mentioning here that the company’s costs escalated due to higher material costs, owing to import tariffs and increasing freight charges.

Fortune Brands expects tariffs to adversely impact its results by $2-$3 million in the fourth quarter of 2018. Further, tariff of 25% will likely impact results in 2019 greatly.

Weak Earnings Estimates & Price Performance: Fortune Brands’ average earnings surprise is negative 4.54%. This average includes the impact of negative 11.43% earnings surprise recorded in the third quarter of 2018.

For 2018, the company revised down its earnings projection from $3.62-$3.72 per share to $3.41-$3.49 per share. It believes that inflation in commodity prices, rising freight costs, Fiberon buyout-related integration costs, softness in the Security segment and impact of bond financing to impact its results.

Additionally, earnings estimates on the stock have been revised down in the past couple of months. Estimates for 2018 were lowered by two brokerage firms while that for 2019 decreased by two and increased by one. Currently, the Zacks Consensus Estimate is pegged at $3.43 for 2018 and $3.86 for 2019, reflecting declines of 1.4% and 1.8% from the respective tallies 60-days ago.

Fortune Brands Home & Security, Inc. Price and Consensus

Fortune Brands Home & Security, Inc. Price and Consensus | Fortune Brands Home & Security, Inc. Quote

Furthermore, the company’s stock price has decreased roughly 32.4% in the past three months versus the industry’s decline of 24.4%.

Other Headwinds: Fortune Brands’ businesses are highly susceptible to natural calamities. Earnings in third-quarter 2018 were adversely impacted by 7 cents per share due to hurricane Florence that disrupted the company’s North Carolina operations. Further, its Plumbing business might witness some adverse impacts due to this in the quarters ahead.

A highly leveraged balance sheet can be concerning for Fortune Brands. In the last five years (2013-2017), the company’s long-term debt increased 33.9% (CAGR) while grew roughly 31.9% from the 2017 level to roughly $2 billion at the end of third-quarter 2018. We believe, if unchecked, high-debt levels can inflate the company’s financial obligations and put pressure on margins.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Ituran Location and Control Ltd. (ITRN - Free Report) , DXP Enterprises, Inc. (DXPE - Free Report) , and EnPro Industries, Inc. (NPO - Free Report) . All these stocks currently sport a Zacks Rank #1 (Strong 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. Further, positive earnings surprise for the last quarter was 30.43% for Ituran Location and Control, 17.95% for DXP Enterprises, and 23.64% for EnPro Industries.

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