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Fortune Brands Home & Security: Attractive Buying Opportunity

 June 22, 2012 01:28 PM


(By Mani) Fortune Brands Home & Security (NYSE:FBHS) offers an attractive buying opportunity as the combination of seasoned management, leading positions in growing categories and tailwinds resulting from a recovery in the housing market position would provide robust earnings growth.

Fortune Brands Home & Security manufactures a wide range of building products including faucets, cabinets, doors, windows, and security and storage devices. The majority of revenue is derived from repair and remodel spending and new residential construction (20%) with North America accounting for more than 95 percent of sales.

[Related -The 10 Best Stocks to Play the Housing Recovery]

The company has four operating segments: 1) Kitchen & Bath Cabinetry (Cabinets); 2) Plumbing & Accessories (Faucets); 3) Advanced Material Windows & Door Systems (Windows & Doors); and 4) Security & Storage.

For the first quarter, it reported net income of $12.5 million or 8 cents per share, compared to a net loss of $10.5 million or 7 cents per share for the year-ago quarter. Excluding items, adjusted earnings per share were 8 cents a share, topping Street view of 3 cents a share.

Net sales for the first quarter rose 12 percent to $798.8 million, exceeding consensus revenue estimate of $750.15 million for the first quarter.

The company sees 2012 adjusted earnings of 77 to 87 cents a share. Analysts currently expect the company to earn 85 cents a share for the full year 2012, implying 47 percent growth from 2011 earnings of 58 cents a share.

[Related -Fortune Brands Home & Security (FBHS): Locking it Up]

The consensus estimates understate the amount of operating leverage embedded in the business model which has incremental margins in the range of 25 percent on a consolidated basis.

Fortune Brands Home derives roughly 70 percent of its domestic revenue base from repair and remodel spending and 30 percent from new residential construction.

"We expect that the plumbing (29% of FY11A sales) and cabinet (38%) segments will benefit from a gradual rise in R&R spending while the windows and exterior door (16%) business will also gain volume due to increased new residential construction activity," RBC Capital Markets analyst Robert Wetenhall, Jr. wrote in a note to clients.

Meanwhile, the security and storage business, which includes the coveted Master Lock brand, should also benefit from the introduction of new products that sell at a higher price points.

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