Fortune Brands: Positive outlook but stock lacks margin of safety | Private Equity Weekly

summary

Fortune Brand Innovation (NYSE: FBIN) is a company that manufactures and sells home and security products. FBIN’s historical revenue growth has been inconsistent and began to decline in 2022.Still, margins remained strong for the quarter as a whole period. In 2023, due to lower sales and continued decline in revenue, profit margins will shrink slightly compared with the same period last year. Looking ahead, the outlook for the real estate market and consumer demand is positive. In addition, FBIN also performed well in the rapidly growing smart home market. Despite the positive outlook, my relative valuation model suggests upside potential of just 4%, and on that note, I recommend a Hold rating.

Historical financial analysis

exist 2020, FBIN reported annual revenue growth of approximately 5.7%. This growth was driven by increased sales volume and higher prices.exist 2021its revenue continues to grow Accelerated growth, with a growth rate of 32.6%.This strong double-digit growth was driven by increased sales, improved pricing, and acquisitions Larsen.However, in 2022, revenue began to decline, reportedly down 1.6%. The decline was due to lower sales due to a slowdown in China’s real estate market and reduced inventory at distribution partners.

Pulling down the income statement, it’s clear that despite fluctuating revenue growth, FBIN’s gross margin and operating margin before expenses and earnings have remained strong over the years. In 2022, its gross profit margin will be approximately 40.9%, and its operating profit margin before expenses and income will be approximately 17.1%, compared with 40.42% and 14.10% respectively in 2020. Overall, management has done an excellent job of maintaining FBIN’s margins despite facing a tough macro environment.

Profit analysis for fiscal year 2023

for fiscal year 2023, sales continued to decline, down 2% year-on-year to approximately US$4.6 billion. In addition, organic sales also fell 6% compared with the same period last year. Sales declined due to lower sales volumes and lower sales in international markets. However, this was partially offset by its acquisitions of ASSA and Aqualisa. Based on the following sales breakdown, Water Innovation’s year-over-year growth was flat. A 14% growth in the security sector was offset by a 12% decline in the outdoor sector. The decline in the outdoor business was due to lower demand and FBIN’s inventory response to weaker demand.

In addition to lower sales, operating margins across all three segments also declined year-over-year due to inventory actions. Water innovation fell 1.5%, outdoor fell 2.8%, and safety fell 6.4%. Taken together, the operating profit margin decreased by 3.1% year-on-year. However, the decline was small, and FBIN’s margins remain strong given softer net sales compared to 2022.

Positive housing market and consumer demand outlook

According to Fannie Mae’s December 2023 Home Buying Confidence Index (High voltage silicon), the index rose to 67.2. The HPSI is an index that tracks end-consumer housing attitudes and intentions. This month’s HPSI growth is a good indication of improving consumer confidence and increasing expectations for future interest rate cuts.

Due to the current housing shortage in the United States, rising home prices are forcing many homebuyers, such as first-time buyers and current homeowners, to wait and stop purchasing due to affordability issues. Additionally, high mortgage rates aren’t helping them. Price increases in December 2023 0.2% Based on the S&P CoreLogic Case-Shiller U.S. National Home Price Index, it hit a record high.

For 2024, the Fed has stated that it will implement three interest rates reduce It may arrive this year. Once the Fed confirms and begins cutting interest rates, it should also lower mortgage rates, which could provide the impetus for the housing market to start growing. Additionally, management said they are seeing signs that the housing market is reaching a trough in demand. They expect the real estate market to grow soon.

Quote: “As we enter 2024, we are starting to see signs that demand and consumers may be about to bottom out, with trend data suggesting that growth should resume in the not-too-distant future”

Strong and fast-growing smart home market

According to FBI data estimateCurrently, the global smart home market is worth approximately US$94 billion. By 2030, it is expected to grow to approximately US$338 billion, with a compound annual growth rate (CAGR) of over 20%. The global smart home market can be divided into five sectors. Two areas FBIN covers are safety and security, at 26%, and energy and water control, at 9%. Therefore, the potential market for FBIN is approximately US$100 billion.

To capture the growth of this rapidly growing smart home market, FBIN has been involved in this field since 2020. Sales of its connected products tripled from 2020 to 2022. As of Q3’23, approximately 4 million connected users were activated for life. In 4Q23 earnings results, sales of FBIN’s digital and connected products, including products such as smart water networks and connected residential locks, reached approximately $250 million. In addition, its user base is growing steadily. As a result of the strong performance, management believes the segment could reach billions in sales as they work to launch new connected products and transform existing non-smart products into smart ones. Therefore, looking forward, I expect the growth of the smart home market coupled with FBIN’s continued innovation to enhance its growth prospects.

relative valuation

FBIN is in the building products industry. Dimensionally, it is smaller than similar products. FBIN’s market capitalization is approximately $10.2 billion, compared with its peers’ median of approximately $14.5 billion, or 0.7 times the median.

In terms of growth prospects, FBIN underperforms its peers, with its expected revenue growth rate of 2.65% lower than its peers’ median of 3.48%. Next, talking about profitability, although FBIN’s gross profit margin TTM is higher, its net profit margin TTM is also lower than that of its peers. FBIN’s gross profit TTM is 41.79%, which is higher than the industry median of 40.93%. Despite its higher gross profit margin, FBIN’s net profit margin TTM is 8.74%, which is lower than its peers’ median of 14.63%.

Currently, FBIN’s forward price-to-earnings ratio is 18.94 times, which is lower than its peers’ median of 19.51 times. Given FBIN’s poor performance in terms of expected revenue growth and net margin TTM, I think it’s fair for FBIN to trade below the median P/E of its peers. However, considering that FBIN’s price-to-earnings discount to its peers is only 3%, it is not enough. To stay conservative, I’ll apply a higher discount of 5% to 18.94x, which gives me about 18x.

FBIN’s market revenue in 2024 is expected to be approximately US$4.85 billion, while in 2025 it will be approximately US$5.11 billion. In terms of earnings per share, consensus estimates for 2024 are around $4.29 and for 2025, estimates are around $4.81. Given the growth catalysts discussed above, market estimates are reasonable as they reflect the same sentiment. By applying 18x to FBIN’s 2025 EPS forecast, my price target is $86.58, representing modest upside potential of 4%.

risk

The risks of holding FBIN are related to a positive housing demand outlook and FBIN’s ability to manage profits amid fluctuations in revenue growth. If housing demand increases when the Federal Reserve cuts interest rates, this scenario would boost FBIN’s expected growth prospects, potentially bringing it to the midpoint of its peers’ expected revenue growth. Furthermore, if revenue starts to turn positive and grow next year, FBIN will report higher earnings per share because of its ability to maintain strong margins. In this case, the market may revise up its expectations.

in conclusion

All in all, FBIN’s revenue growth has been volatile in the past, as it reported growth in 2020 and 2021 but declined in 2022 and 2023. Despite the fluctuations in revenue growth, management has done a good job of maintaining margins over the same period. There was almost no movement.

Looking to 2024 and beyond, the housing market outlook and consumer demand are positive as the Federal Reserve is expected to cut interest rates, thereby lowering mortgage rates and increasing housing demand. In addition, FBIN also actively expands the rapidly growing smart home market through continuous innovation and the launch of new products. Despite the positive outlook, my valuation model suggests upside potential of only 4%. Therefore, I recommend a Hold rating on FBIN.