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Fortune Brands (FBHS) Q4 Earnings Miss Estimates, Improve Y/Y

Zacks Equity Research

Fortune Brands Home & Security, Inc. FBHS has reported weaker-than-expected results for the fourth quarter of 2018, delivering negative earnings surprise of 8.5%. This was the company’s fourth consecutive quarter of recording lower-than-expected results, the average for the four quarters being 6.98%.

Earnings before charges/gains in the reported quarter were 86 cents per share, lagging the Zacks Consensus Estimate of 94 cents. On a year-over-year basis, the bottom line improved 7.5% on the back of sales growth, margin improvement and 7.6% fall in share count.

For 2018, the company’s earnings before charges/gains were $2.66 per share, lagging the Zacks Consensus Estimate of $3.42 and declining 13% from the year-ago tally of $3.05.

Growth in Plumbing and Doors & Security Drive Revenues

In the quarter under review, Fortune Brands’ net sales were $1,420.7 million, increasing 2.8% from the year-ago tally. The improvement was driven by healthy growth in Plumbing, and Doors & Security segments.

However, the top line lagged the Zacks Consensus Estimate of $1.46 billion.

The company’s segmental results are discussed below:

The Cabinets segment’s sales declined 0.2% year over year to $624.8 million. As noted, growth in builder direct and dealer business were offset by the decrease in order from Canada and homecenter.

Plumbing sales grew 4.1% year over year to $488.4 million on the back of organic sales growth of 3%. This was driven by strengthening wholesale businesses in China and the United States, partially offset by forex woes and reduction in channel inventory.

The Doors & Security segment’s sales increased 7% year over year to $307.5 million, backed by gains from buyouts of Fiberon and Therma-Tru doors. However, it was partially offset by decrease in sales from security products.

For 2018, the company’s net sales were $5,485.1 million, increasing 3.8% year over year and lagging the Zacks Consensus Estimate of $5.53 billion.

Margins Weak Y/Y

In the fourth quarter, Fortune Brands’ cost of sales before charges/gains increased 4.5% year over year to $921.6 million. It represented 64.9% of net sales compared with 63.8% in the year-ago quarter. Selling, administrative, and research and development expenses before charges/gains grew 0.3% year over year to $30.7.7 million while came in at 21.7% of the net sales versus 22.2% in the year-ago quarter.

Notably, inflation and tariffs heightened costs by $90 million in 2018.

Operating income before charges/gains decreased 2.7% year over year to $180.6 million. Operating margin before charges/gains slipped 70 basis points to roughly 12.7%. Interest expenses in the reported quarter surged 81.4% year over year to $23.4 million.

Balance Sheet & Cash Flow

Exiting the fourth quarter, Fortune Brands’ cash and cash equivalents were $262.9 million, down 32.6% from $389.9 million at the end of the previous quarter. Its long-term debt declined 9% sequentially to $1,809 million. It is worth mentioning here that the company raised $826.2 million funds from debts during 2018.

In 2018, the company generated net cash of $604 million from operating activities, reflecting 0.6% increase from the previous year. Capital expenditure amounted to $150.1 million versus $165 million in 2017. Free cash flow inched up 0.2% year over year to $464.9 million.

During the year, the company used $694.6 million to purchase treasury stocks while paid dividends amounting to $115.2 million.

Outlook

For 2019, Fortune Brands anticipates moderate growth in markets while predicts continued focus on operational improvements. The company predicts the U.S. home products market to grow 2-4% in the year and the global market to grow 2-4% as well.

Sales in the year are expected to increase by 6-7.5% over the previous year, including organic sales growth of 3-5%. Earnings before charges/gains are estimated to be $3.53-$3.77 per share, reflecting year-over-year growth of 9% at the mid-point.

Fortune Brands Home & Security, Inc. Price, Consensus and EPS Surprise

 

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

Zacks Rank & Key Picks

With a market capitalization of approximately $6.2 billion, Fortune Brands currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the industry are Alarm.com Holdings, Inc. ALRM, Axon Enterprise, Inc. AAXN and Resideo Technologies Inc. REZI. While both Alarm.com and Axon Enterprise currently sport a Zacks Rank #1 (Strong Buy), Resideo Technologies carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for Alarm.com and Axon Enterprise remained unchanged for 2019 while improved for Resideo Technologies. Also, earnings surprise in the last reported quarter was positive 44% for Alarm.com, 66.67% for Axon Enterprise and 33.33% for Resideo.

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