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Will Allegion be Able to Sustain Momentum Amid Headwinds?

Zacks Equity Research

Allegion plc ALLE has impressed investors with its recent earnings streak, having surpassed estimates thrice in the four trailing quarters. The company’s share price increase reflects its impressive performance, exhibiting investor optimism over the stock. In the past three months, the stock has gained 6%, outperforming the industry’s growth of 3.6%.

We believe that the company’s notable traction across markets will drive growth in the upcoming quarters.

Factors to Consider

Allegion is well poised to gain from stronger demand for its electronic products, strength in residential and non-residential businesses and increased connected security solutions demand in the quarters ahead. In addition, business acquisitions are likely to support top-line growth of the company. For 2018, the company has raised its revenue growth guidance from 12.5-13.5% to 13-13.5%. Notably, organic revenue growth for the full year is currently predicted to lie within 5-5.5%, higher than the prior view of 4-5%.

Also, the company anticipates that stronger revenues, lower taxes, ongoing pricing actions and greater operational efficacy will boost its earnings in the upcoming quarters. As a matter of fact, it has revised its earnings view for 2018 from $4.35-$4.50 per share to $4.43-$4.50.

Allegion’s focus on updating its products and developing new ones are expected to act as key growth drivers. This enables the company to keep up with the changing market sentiment toward electronic security products and solutions. In fact, sales of such electronic security products are growing at a steady rate compared with their traditional mechanical counterparts. The company continues to focus on making incremental investments in organic growth for new product development.

However, Allegion is currently dealing with adverse impacts of rising cost of sales. In the third quarter of 2018, its cost of sales jumped 20% year over year primarily due to material cost inflation. If unchecked, rising costs and expenses can hurt its margins in the quarters ahead.

In addition, on a P/E (TTM) basis, Allegion looks a bit overvalued compared with the industry, with respective tallies of 21.4x and 17.9x for the period. This makes us a bit cautious about the stock.

Zacks Rank & Stocks to Consider

Allegion currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space are Alarm.com Holdings, Inc. ALRM, Axon Enterprise, Inc AAXN and Brady Corporation BRC. While Alarm.com Holdings and Axon Enterprise sport a Zacks Rank #1 (Strong Buy), Brady carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alarm.com Holdings exceeded estimates in each of the preceding four quarters, the average positive earnings surprise being 27.26%.

Axon Enterprise surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 391.67%.

Brady outpaced estimates thrice in the trailing four quarters, the average positive earnings surprise being 7.04%.

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