Fortune Brands' Segmental Opportunities Solid, Costs A Drag
Zacks Investment Research | Jun 11, 2018 09:14PM ET
We issued an updated research report on Fortune Brands Home & Security, Inc. (NYSE:FBHS) on Jun 12.
This security and safety service provider currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $8.4 billion.
Let’s delve deeper and discuss the company’s potential growth drivers and possible headwinds.
Factors Aiding Fortune Brands
Favorable Operating Conditions: We believe that security and safety service provider companies are poised to benefit from the strengthening of U.S. economy and healthy growth prospects of the global market. Considering the domestic housing market, increase in housing starts, as well as higher demand for repair and remodeling activities, will spur demand for Fortune Brands’ products.
For 2018, the company anticipates home products market in the United States to grow 5-7% while the global market is expected to increase 5-6%.
To leverage gains from such favorable operating conditions, the company has been diligently working toward solidifying its product portfolio. The addition of brands like Shaws of England and Victoria + Albert to the Global Plumbing Group in 2017 is worth mentioning here. These assets are anticipated to generate combined revenues of $45 million annually for the company.
Reward for Shareholders: Fortune Brands ardently believes in rewarding shareholders handsomely, especially through dividend payments and share buybacks. Over the last five years, the company’s annual dividend payment has grown from 30 cents in 2013 to 72 cents in 2017. After an 11% hike in the quarterly dividend rate announced in December 2017, the company’s annual dividend rate now stands at 80 cents.
Also, in April 2018, share buyback program of $150 million was authorized by the board of directors. This program has two-year validly and shares can be repurchased in the open market or through privately negotiated transactions. This, along with $160 million left from the earlier $250-million program — which was authorized in December 2017 and is slated to expire on Dec 8, 2019 — allows the company to repurchase up to $310 million of its common shares.
Growth Projections: Solidifying business of Global Plumbing Group, favorable pricing and its cost actions, as well as ongoing share buybacks, will benefit Fortune Brands in 2018. The company anticipates sales to grow by 6-7% in the year. Earnings per share (before charges/gains) are predicted to be $3.58-$3.70, higher than $3.54-$3.66 expected earlier. The mid-point of the revised forecast is well above the year-ago earnings of $3.08.
Also, Plumbing, Doors and Security segments are anticipated to flourish in the year. For the Doors segment, sales are projected to increase in low-double digits, better than high-single digit to low-double digits expected earlier, on the back of the expansion in retail business. For the Security segment, sales are predicted to increase in mid-single digit while for the Plumbing segment sales will likely grow in the low-double digits versus high-single digit expected earlier.
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Factors Working Against Fortune Brands
Poor Share Price Performance and Valuation, Lower Earnings Estimates: In the first quarter of 2018, Fortune Brands reported weaker-than-expected results with earnings of 56 cents per share, lagging the Zacks Consensus Estimate of 59 cents by 5.08%. Also, net sales missed estimates by 0.4%. Revenues from the Cabinets segment were weak in the reported quarter, declining 3% year over year. For 2018, the company has lowered its sales growth projection for the Cabinets segment. It is now anticipating growth in the low-single-digit range versus mid-single digit predicted earlier.
In the past three months, the company’s shares have declined 7.6% versus 6.6% decrease recorded by the Zacks Investment Research
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