Why Is Allegion (ALLE) Down 6.2% Since Last Earnings Report?
It has been about a month since the last earnings report for Allegion (ALLE). Shares have lost about 6.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Allegion due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Allegion Beats on Q2 Earnings, Raises 2023 EPS View
Allegion reported mixed results for second-quarter 2023. ALLE’s earnings surpassed the Zacks Consensus Estimate by 4.1%. However, sales missed the same by 1.6%.
Adjusted earnings in the quarter under review were $1.76 per share, surpassing the consensus estimate of adjusted earnings of $1.69 per share. The bottom line increased 28.5% from the year-ago period’s earnings of $1.13 per share.
Revenue Details
In the quarter under review, Allegion’s revenues were $912.5 million, increasing 18% from the year-ago quarter. Organic sales in the quarter increased 5.6%, driven by robust price realization and strong growth in the electronics end market.
However, the results were partially affected by lower volumes in the mechanical portfolio. Acquired assets boosted sales by 12.5%. Forex woes left an impact of 0.1% on revenues. Allegion’s revenues missed the Zacks Consensus Estimate of $927 million.
ALLE reported revenues under two segments. A brief discussion of the quarterly results is provided below:
Revenues from Allegion Americas increased 23.8% year over year to $727.2 million. It accounted for 79.7% of the quarter’s sales. Organic sales increased 7.7% year over year, driven by price realization across all businesses.
Acquired assets contributed 16.4% to total sales growth. However, forex woes left an impact of 0.3% on revenues. Operating income was $195.4 million for the quarter, up 27.5% year over year.
Revenues from Allegion International were $185.3 million in the quarter, down 0.3% year over year. The metric accounted for 20.3% of the quarter’s sales.
Organic sales decreased 1% year over year, while foreign currency translation had a negative impact of 0.6% on sales. Operating income was $13.9 million for the quarter, up 18.8% year over year.
Margin Profile
In the reported quarter, Allegion’s cost of sales grew 22.3% year over year to $510.6 million. The cost of sales was 56% of the quarter’s net sales. The gross profit increased 27.6% year over year to $401.9 million, while the gross margin jumped 330 basis points (bps) to 44%.
Selling and administrative expenses increased 29.4% year over year to $217.3 million. The metric represented 23.8% of net sales in the reported quarter, compared with 21.7% in the year-ago period. Adjusted EBITDA was $215.4 million, reflecting a year-over-year increase of 23.9%. The margin grew 110 bps year over year to 23.6%.
The adjusted operating income in the quarter increased 25.5% year over year to $202.6 million. The adjusted margin was 22.2%, up from 20.9% a year ago. The results were attributable to the positive price and productivity net of inflation and investments.
Interest expenses were $23.7 million, up 37.8% year over year due to increased debt from the Access Technologies acquisition and a rise in variable interest rates. The effective tax rate in the quarter was 12.6%, down from 13.6% in the year-ago quarter.
Balance Sheet and Cash Flow
While exiting the second quarter of 2023, Allegion had cash and cash equivalents of $322.6 million, compared with $288.0 million at the end of fourth-quarter 2022. Long-term debt was $2,046.7 million, compared with $2,081.9 million reported at the end of fourth-quarter 2022.
In the first six months of 2023, ALLE generated net cash of $230.1 million from operating activities, increasing 110.9% from the previous year’s level. Capital expenditure was $40.0 million, increasing 62.6% year over year. The free cash flow was $190.1 million for the first six months of 2023.
In the same period, Allegion repurchased shares for $19.9 million, down 64.4% year over year. Dividends paid out totaled $79.3 million, reflecting an increase of 10.9% from the previous year’s level.
Outlook
ALLE has tightened its sales guidance for 2023. Allegion now expects revenues of 11.5-12.5%, compared with 11.5-13.5% mentioned earlier. The company anticipates organic sales of 5.5-6.5%, compared with 5.5-7.5% stated earlier.
However, the company has increased its 2023 earnings guidance. Earnings are predicted to be $6.10-$6.20 per share, compared $5.95-$6.15 per share mentioned earlier. Adjusted earnings are likely to be $6.70-$6.80 per share, compared with $6.55-$6.75 per share stated before. The Zacks Consensus Estimate for the same stands at $6.64 per share.
The company expects a free cash flow of $500-$520 million, compared with $480-$500 million mentioned earlier. The tax rate in the year is expected to be 15-15.5%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
VGM Scores
At this time, Allegion has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Allegion has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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