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Fortune Brands Surges 65.7% YTD: What's Driving the Stock?

Zacks Equity Research

Shares of Fortune Brands Home & Security, Inc. FBHS have rallied 65.7% so far this year. This Zacks Rank #3 (Hold) stock, which has a market cap of $8.8 billion, has outperformed its industry’s growth of 35.7% over the same time frame.

Let’s analyze the reasons behind the company’s impressive price performance and find out if there is room for further appreciation.

Growth Drivers

Fortune Brands has been solidifying its product portfolio and leveraging business opportunities through acquisition of assets. In this regard, the buyout of Fiberon, LLC (completed in September 2018) is worth mentioning. The deal has been complementing Fortune Brands' existing door brand — Therma-Tru — and is also enhancing its growth opportunities in the outdoor living space. Moreover, its distribution partnership with OrePac (inked in July 2019) will enable Fiberon business to expand product offerings in the western region of the United States.

Also, strength in the United States and China markets coupled with product launches is likely to boost Fortune Brands’ Plumbing revenues. In addition, antidumping duties and investments in innovations are likely to support the company’s Cabinets segment.

Trend in Estimate Revisions

The Zacks Consensus Estimate for 2019 earnings has increased 0.3% over the past seven days from $3.57 to $3.58. In addition, the consensus estimate for 2020 earnings has improved 0.5% from $3.92 to $3.94 over the same time frame.

Solid Q3 Performance & View

Fortune Brands reported adjusted earnings per share of 95 cents in third-quarter 2019, marking a 2.2% year-over-year rise. This improvement was primarily attributable to solid sales performance, driven by healthy growth in Plumbing and Doors & Security segments.

For 2019, sales are expected to increase in the range of 5-6%, whereas earnings before charges/gains are estimated to be $3.53-$3.63 per share.

However, a highly leveraged balance sheet seems to be a concern for Fortune Brands. The company had long-term debt of $1,949 million at the end of the third quarter, reflecting 7.7% increase from the 2018 end level. Higher debts also increased its interest expenses by 41% year over year to $71.8 million in the first three quarters of 2019. Further, the company seems to be more leveraged than the industry, with respective long-term debt-to-capital ratio of 47.2% and 38.2%.

Key Picks

Some better-ranked stocks from the same space are Allegion plc ALLE, Intellicheck, Inc. IDN and NAPCO Security Technologies, Inc. NSSC. 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.

Allegion pulled off average positive surprise of 2.17% in the last four quarters.

Intellicheck pulled off average positive surprise of 4.76% in the last four quarters.
NAPCO pulled off average positive surprise of 41.87% in the last four quarters.

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