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Fortune Brands (FBHS) Prices $700M Senior Notes Offering

Zacks Equity Research

Fortune Brands Home & Security, Inc. FBHS, on Sep 9, priced a registered public offering of $700 million of 3.25% senior unsecured notes. This offering is anticipated to close on Sep 13, 2019, depending on customary closing conditions.

As noted by the company, the notes offered are due to mature on Sep 15, 2029 and have been priced at 99.830% of the principal amount. Notably, interest rates on the notes will be paid semi-annually on Mar 15 and Sep 15, starting from Mar 15, 2020.

Ratings of the issuance are expected to be Baa3 by Moody's Investors Service, BBB+ by Standard & Poor’s and BBB by Fitch.

Fortune Brands intends to utilize the funds for paying down its current term loan and revolving credit facility.

Debt Profile

The company has a highly leveraged balance sheet. Its long-term debt jumped roughly 20.9% (CAGR) in the last five years (2014-2018). Exiting second-quarter 2019, the company had long-term debt of approximately $1,666 million. Its net interest expenses were $24.5 million compared with $23.7 million in the first quarter. Although the current notes offering will help in meeting general corporate purposes, we believe that it will also add to Fortune Brands’ existing debt balance. Unwarranted rise in debt levels can inflate its financial obligations and hurt profitability.

Existing Business Scenario

Fortune Brands remains bullish about its growth prospects across all three business segments — Doors & Security, Plumbing and Cabinets. For instance, strength across Therma-Tru and Master Lock businesses, supported by the company’s incremental investments for new product launches is likely to boost revenues of its Doors & Security segment. Also, continued strength in the U.S. and China markets is likely to strengthen the company’s Plumbing revenues in the quarters ahead. Moreover, strong demand across most of its product lines, particularly the value cabinets category products, is likely to drive revenues of the company’s Cabinets segment.

In the past six months, this Zacks Rank #3 (Hold) stock has gained 15.8% compared with the industry’s growth of 6.8%.



However, rising cost of sales and operating expenses remain a major concern for Fortune Brands. In both the first and second quarter of 2019, the company’s cost of sales jumped 7% on a year-over-year basis.  As a matter of fact, it expects inflation (inclusive of commodity inflation, tariffs and logistics) to adversely impact its business by about $100 million in 2019.

Stocks to Consider

Some better-ranked stocks from the same space are Brady Corporation BRC, Johnson Controls International plc JCI and Intellicheck Mobilisa, Inc. IDN. All these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brady pulled off a positive average earnings surprise of 9.68% in the trailing four quarters.

Johnson Controls pulled off a positive average earnings surprise of 4.54% in the trailing four quarters.

Intellicheck Mobilisa's earnings surprise in the last reported quarter was 14.29%.

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