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Fortune Brands Gains From Segmental Health Despite High Costs

Zacks Equity Research

We issued an updated research report on Fortune Brands Home & Security, Inc. FBHS on Jun 14.

This security and safety service provider currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $7.3 billion.

Let’s delve deeper and discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Fortune Brands

Share Price Performance, Earnings Projections: Market sentiments seem to be working in favor of Fortune Brands over time. In the past three months, the company’s share price has gained 15.8%, higher than the industry’s growth of 11.4%.




We believe that impressive financial results helped in driving sentiments for the stock. Regal Beloit in the last reported quarter (first-quarter 2019) recorded positive earnings surprise of 6.78%. Its share has increased 6.7% since the results released on Apr 24, 2019.

For 2019, the company anticipates gaining from solid growth opportunities for the segments (explained below), synergistic gains from acquired assets, product innovations and capacity expansion. Revenues for the year are predicted to increase 6-7.5% on a year-over-year-basis while earnings are predicted to grow 9% to $3.53-$3.77 per share.

Also, the Zacks Consensus Estimate for the company’s earnings was revised upward for Fortune Brands. It currently is pegged at $3.66 for 2019 and $4.02 for 2020, reflecting growth of 0.8% and 0.5% from the 60-day-ago figures.

Fortune Brands Home & Security, Inc. Price and Consensus

 

Fortune Brands Home & Security, Inc. Price and Consensus

Fortune Brands Home & Security, Inc. price-consensus-chart | Fortune Brands Home & Security, Inc. Quote

Segmental Growth Opportunities: The company operates through three business segments — Cabinets, Plumbing, and Doors & Security. In the first quarter of 2019, sales performances of these segments helped drive its top line.

For 2019, Fortune Brands anticipates its Plumbing segment’s sales to increase in a mid to high-single-digit range. Cabinets will benefit from healthy demand across product lines. This segment’s sales are predicted to grow 3-4%. For the Doors & Security segment, healthy demand for Therma-Tru and Master Lock products will be beneficial.

Capital Allocation Strategies: The company effectively uses capital for making acquisitions, investing in growth projects and rewarding shareholders handsomely. With regard to buyouts, Fiberon (acquired in September 2018) has been strengthening Fortune Brands’ existing door brand — Therma-Tru — and enhancing its growth opportunities in the outdoor living space.

Also, the company believes in rewarding shareholders with dividend payments and share repurchase. In 2018, it used $470 million on the Fiberon buyout, $695 million for repurchasing shares and $115 million for paying dividends. Also, the company announced a 10% hike in its quarterly dividend rate in December 2018.

Factors Working Against Fortune Brands

High Costs Troubling: The company has been suffering from risks arising from higher costs and expenses. In the first quarter of 2019, its cost of sales increased 7% on a year-over-year basis. High freight charges and raw material price inflation might be behind the escalation.

For 2019, the company believes that inflation caused by tariffs will adversely influence its results by $65 million.

High Debts: Fortune Brands suffers from adverse impacts of high debt levels. In the last five years (2014-2018), the company’s long-term debt increased 22.9% (CAGR). This metric stood at $2,169.7 million at the end of the first quarter of 2019, reflecting sequential growth of 19.9%.

Other Headwinds: Fortune Brands’ businesses are highly susceptible to natural calamities. Hurricane Florence adversely impacted the company’s Plumbing segment and also impacted some of its cabinet operations. Recurrence of such natural calamities might disturb its operations.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are NAPCO Security Technologies, Inc. NSSC, Chart Industries, Inc. GTLS and Dover Corporation DOV. While NAPCO Security and Chart Industries currently sport a Zacks Rank #1 (Strong Buy), Dover 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 these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 71.03% for NAPCO Security, 16.56% for Chart Industries and 8.61% for Dover.

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