Why Chilton opens new position in Fortune Brands Home & Security
Analyzing Chilton Investment Company's 2Q14 portfolio (Part 2 of 11)
Chilton and Fortune Brands Home & Security Inc.
Chilton Investment added new positions in Fortune Brands Home & Security Inc. (FBHS), J.B. Hunt Transport Services Inc. (JBHT), Now Inc. (DNOW), Gartner Inc. (IT), and Kansas City Southern (KSU). The company sold positions in Canadian Pacific Railway Ltd. (CP), Spansion Inc. (CODE), LKQ Corporation (LKQ), Avago Technologies Ltd. (AVGO), and KKR & Co. L.P. (KKR).
Chilton Investment’s new position in Fortune Brands Home & Security Inc. accounts for 1.77% of the fund’s 2Q U.S. long portfolio.
Overview of Fortune Brands
Fortune Brands Home & Security Inc. is a manufacturer of home and security products and services. The company was formed in 2011 as a spinoff of the former consumer brand’s company, Fortune Brands.
The spinoff was a corporate strategy to separate the unrelated product lines, so that Fortune Brands could be a pure-play spirits company. Fortune Brands renamed itself as Beam Inc. In April 2014, Suntory acquired the brand and changed the name to Beam Suntory.
Business Segments
Fortune Brands Home & Security Inc. has four business segments:
The kitchen & bath cabinetry segment makes custom, semi-custom, and stock cabinetry for the kitchen, bath and other parts of the home. It has brands like Aristokraft, Kitchen Craft, Kitchen Classics, Omega, Schrock, Homecrest, Decorá, Diamond, Kemper, Thomasville, and Martha Stewart Living.
The plumbing & accessories segment makes and assembles faucets, accessories, and kitchen sinks in North America, China, and India, under the Moen brand.
The advanced material windows & door systems segment manufactures fiberglass and steel entry door systems, vinyl-framed window and patio doors, and urethane millwork product lines. It has brands like Therma-Tru and Fypon.
The security & storage segment makes locks, safety and security devices, and electronic security products. It has brands like Master Lock, Sears Craftsmen, and Waterloo.
Recent acquisition of Sentry Safe
Fortune Brands recently acquired Sentry Safe, a manufacturer of personal safes and protective containers for residential and light commercial markets. The transaction closed on July 29, 2014, for $117.5 million and Sentry Safe will now become part of Fortune’s Master Lock brand.
This acquisition will provide the company more growth opportunities as Sentry Safe is a leading North American consumer brand. It will broaden the company’s product line, expand channels and distribution networks, and will strengthen the brand value.
Fortune Brands sells off Simonton windows
Fortune recently sold off Simonton Windows to Ply Gem Holdings, a manufacturer of exterior building products in North America, for approximately $130 million. The company sold this business so it could focus more on Therma-tru entry door and Fypon trim business, which will drive the company’s profits with strong distribution networks and innovative product lines.
Fortune Brands’ financial results in 2Q14
In 2Q14, Fortune Brands’ sales were up 10% over sales in 2Q13. EPS was $0.55 as compared to $0.37 in the corresponding period last year.
In terms of segment results, kitchen & bath cabinetry sales were up 19% because of the increase in dealer channels. Plumbing & accessories sales were up 5% due to strong growth in the U.S. wholesale and international channels. Advanced material windows & door systems sales were up 9%. Entry doors sales were up 11% and windows sales increased 7% over the prior year. Security & storage sales were down 5%.
Fortune Brands’ 2014 outlook
Fortune Brands expects to outperform the market due to its recent acquisition of Sentry Safe and share repurchases of approximately $375 million. It expects full year 2014 net sales to increase 9% to 11% and forecast $225 million to $250 million in free cash flow.
In the earnings call, the company revealed plans to make continuous investments to achieve the sales growth of roughly $6 million in the next three years. The company will also focus on increasing shareholder value by gaining valuable assets and returning excess cash in the form of dividends and share repurchases.
The next article in the series will discuss Chilton Investment’s new position in J.B. Hunt Transport Services.
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