We issued an updated research report on Allegion plc ALLE on Jun 21.
This security and safety service provider currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $10.1 billion.
Let’s delve deeper and discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Allegion
Share Price Performance, Earnings Projections: Market sentiments seem to be working in favor of the company over time. In the past three months, its share price has gained 24.1%, higher than the industry’s growth of 11.8%.
We believe that impressive financial results helped in driving sentiments for the stock. The company recorded positive earnings surprise of 1.15% in the first quarter of 2019. Its share price has increased 12.1% since the results released on Apr 25, 2019.
For 2019, the company anticipates gaining from solid product portfolio, effective pricing actions, greater operational excellence and lower taxes. Adjusted earnings per share in the year are predicted to be $4.75 to $4.90, suggesting year-over-year growth of 6-9%.
Top-Line Strength: Allegion is well poised to gain from growing demand for security products, especially electronic products. To expand its core market, it is trying to chalk out channel strategies and invest in digital demand creation.
In the first quarter of 2019, the company’s revenues surpassed estimates by 0.5% and increased 6.8% year over year. In the quarters ahead, Allegion believes that healthy growth in non-residential businesses, rising demand for electric security products and acquired assets will be beneficial. For 2019, revenues are predicted to grow 5-6% year over year.
Shareholder-Friendly Policies: The company effectively uses capital for rewarding shareholders handsomely through dividend payments and share buybacks. It is worth mentioning here that it increased the quarterly dividend rate by 29% in February 2019. Also, a share buybacks program of $500 million was authorized by Allegion’s board of directors in February 2017.
In the first quarter of 2019, the company paid dividends totaling $25.2 million and repurchased 0.7 million shares worth $63.8 million.
Factors Working Against Allegion
Valuation & Lowered Earnings Estimates: Allegion’s shares currently seem overvalued compared with the industry, using the Price/Earnings (TTM) valuation method. The stock’s P/E multiple is 23.64x, higher than the industry’s multiple of 22.78x. Also, the stock is currently trading higher than the industry’s three-month multiple of 22.78x. This makes us cautious about the stock.
Also, the company’s earnings estimates for the second quarter and 2019 have been lowered in the past 60 days. The Zacks Consensus Estimate is currently pegged at $1.31 for the second quarter and $4.84 for 2019, suggesting a decline of 0.8% and 0.2%, respectively, from the figure mentioned 60 days ago.
Allegion PLC Price and Consensus
Allegion PLC price-consensus-chart | Allegion PLC Quote
High Costs Troubling: The company has been suffering from risks arising from higher costs of sales. In the first quarter of 2019, its cost of sales increased 6.4% on a year-over-year basis. Raw material price inflation might be behind this escalation.
Rising costs, if unchecked, will continue to dent Allegion's margins in the quarters ahead.
Forex Woes: Geographical diversification is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of 2019, forex woes adversely impacted its sales growth by 2.3%.
Persistence of such headwinds will continue impacting the company’s top-line results.
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Roper Technologies, Inc. ROP, Chart Industries, Inc. GTLS and DXP Enterprises, Inc. DXPE. While Roper and Chart Industries currently sport a Zacks Rank #1 (Strong Buy), DXP Enterprises carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 30 days, earnings estimates for all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 8.43% for Roper, 16.56% for Chart Industries and 48.47% for DXP Enterprises.
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