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Fortune Brands to Gain From Strong End Markets Amid Risks

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On Feb 14, we issued an updated research report on Fortune Brands Home & Security, Inc. (FBHS - Free Report) .

In the past three months, this Zacks Rank #3 (Hold) stock has returned 14.8% compared with the industry’s rally of 1.3%.

Existing Scenario

Strength in the U.S. housing market, supported by expected solid new construction growth, strength in China market and new product launches, is likely to augment Fortune Brands’ Plumbing and Doors & Security segments’ revenues in the quarters ahead. Also, solid demand for decking products along with strength in security business, supported by the company’s incremental investments for product launches, is likely to support its Doors & Security segment. Going forward, strong demand for its value price point cabinetry products as well as investments in capacity expansion is likely to support results for the Cabinets segment. For 2020, the company expects its overall sales to grow 5-6% year over year.

Also, Fortune Brands’ focus on optimizing cost structure through supply chain, manufacturing footprint optimization, and other initiatives are likely to improve margins and its financial performance in 2020. Earnings before charges/gains are estimated to be $3.83-$4.03 per share 2020, reflecting year-over-year growth of 9.2% at the mid-point.

Moreover, it remains focused on strengthening its competency on business acquisitions. In September 2018, the company completed the acquisition of Fiberon, LLC. The $470-million buyout has been complementing Fortune Brands' existing door brand — Therma-Tru — and enhancing its growth opportunities in the outdoor living space. Of late, the company has been investing in capacity and product line expansion in the security business and the acquired Fiberon business.

However, rising costs and expenses have been an issue for Fortune Brands over the past few quarters. In the third and fourth quarters of 2019, Fortune Brands’ cost of sales rose 5% and 2%, respectively, on a year-over-year basis. Also, in the third and fourth quarters, its selling, general and administrative expenses increased 2% and 1%, respectively. Of late, inflation (inclusive of commodity inflation, tariffs and logistics) has been raising Fortune Brands' aggregate costs. For 2020, the company expects inflation to be in the range of $40-$50 million.

In addition, rise in debt level remains a concern for the company. Notably, in the last five years (2015-2019), its long-term debt rose 8.8% (CAGR). Notably, at the end of fourth-quarter 2019, its total debt was $2,184.3 million, up 12.1% on a sequential basis.

Key Picks

Some better-ranked stocks from the same space are Intellicheck, Inc. IDN, Holdings, Inc. ALRM and Johnson Controls International plc JCI. While Intellicheck sports a Zacks Rank #1 (Strong Buy), Holdings and Johnson Controls carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intellicheck delivered earnings surprise of 4.76%, on average, in the trailing four reported quarters. Holdings pulled off positive earnings surprise of 16.93%, on average, in the previous four reported quarters.

Johnson Controls delivered earnings surprise of 4.43%, on average, in the trailing four reported quarters.

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