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3 Remains A Crowd At Fortune Brands
Fortune Brands (NYSE:FO) bills itself as a leading consumer brands company. Unfortunately, many of its leading brands have proven highly economically sensitive and two of three divisions continue to face significant sales and profit headwinds. An upcoming battle with an activist investor could mean changes going forward, though the stock has already rallied strongly in anticipation of any corporate improvements.
IN PICTURES: Consumer "Fads" That Haven't Faded
Third-Quarter Sales Review
Net sales were virtually flat, rising 0.2% to $1.72 billion. Organic growth was about 1%, but was offset by items including foreign currency fluctuations and excise taxes. Comparable sales rose 2% in the spirits division, 1% in housing products and 3% in the golfing unit. Total sales in each division were 1%, 1.4% and negative 4.8%, respectively. Challenging golf industry conditions were confirmed by arch rival Callaway Golf (NYSE:ELY), as it reported a profit loss and declining sales during its own third quarter.
The spirits portfolio continued its consistent ways as sales of brands including Jim Beam, Maker's Mark and Canadian Club grew slightly. Growth in the home products market was a nice surprise, and held up well as the home buyer tax credit expired in the second quarter. Management boasted that it is performing better than the market and winning business in cabinetry and faucet categories, just to name a few. Fortune competes with pure-play firms such as Masco (NYSE:MAS) in this space.
Profit Recap and Outlook
Low single-digit increases in excise taxes on alcohol and advertising and other corporate expenses lowered operating income, as did a hefty restructuring charge of about $15 million. As a result, reported operating income fell 13.5% to $176.8 million.
Divisionally, operating profits fell nearly 19% in spirits to mirror a profit decline at rival Constellation Brands (NYSE:STZ). Golf division profits fell a more severe 43.3% and rose a modest 4% in the home division. For the full year, analysts project sales growth of about 6% to $7.1 billion. Management said to expect between $2.60 and $2.90 in earnings per share and free cash flow in a range of $625 million to $700 million.
The Bottom Line
If management is looking to fend off the advances of activist hedge fund manager Will Ackman, it will need to perform better than it did during the third quarter. It is certainly valid to question why three seemingly disparate businesses operate under one corporate umbrella. Management labels its different businesses as "trusted brands combined with strong innovation", but operates two divisions that continue to see negative secular trends. It could take a decade before the housing market recovers from its bubble, and golf demand has also been weak for a few years, with little predicted improvement on the horizon. This leaves the appealing spirit business, which would ideally be freed from the corporate fold.
Unfortunately, Fortune's stock has already rallied strongly on hopes that Ackman will swoop in and make needed improvements in the business mix. At current share prices, the forward P/E is nearly 19-times this year's earnings, if Fortune hits the high end of its earnings guidance. The multiple is more reasonable when looking at free cash flow though, and could still indicate there is upside potential from current levels. (For more, see 10 Golf Tips To Help Investors Tee Off.)
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IN PICTURES: Consumer "Fads" That Haven't Faded
Third-Quarter Sales Review
Net sales were virtually flat, rising 0.2% to $1.72 billion. Organic growth was about 1%, but was offset by items including foreign currency fluctuations and excise taxes. Comparable sales rose 2% in the spirits division, 1% in housing products and 3% in the golfing unit. Total sales in each division were 1%, 1.4% and negative 4.8%, respectively. Challenging golf industry conditions were confirmed by arch rival Callaway Golf (NYSE:ELY), as it reported a profit loss and declining sales during its own third quarter.
The spirits portfolio continued its consistent ways as sales of brands including Jim Beam, Maker's Mark and Canadian Club grew slightly. Growth in the home products market was a nice surprise, and held up well as the home buyer tax credit expired in the second quarter. Management boasted that it is performing better than the market and winning business in cabinetry and faucet categories, just to name a few. Fortune competes with pure-play firms such as Masco (NYSE:MAS) in this space.
Low single-digit increases in excise taxes on alcohol and advertising and other corporate expenses lowered operating income, as did a hefty restructuring charge of about $15 million. As a result, reported operating income fell 13.5% to $176.8 million.
Divisionally, operating profits fell nearly 19% in spirits to mirror a profit decline at rival Constellation Brands (NYSE:STZ). Golf division profits fell a more severe 43.3% and rose a modest 4% in the home division. For the full year, analysts project sales growth of about 6% to $7.1 billion. Management said to expect between $2.60 and $2.90 in earnings per share and free cash flow in a range of $625 million to $700 million.
The Bottom Line
If management is looking to fend off the advances of activist hedge fund manager Will Ackman, it will need to perform better than it did during the third quarter. It is certainly valid to question why three seemingly disparate businesses operate under one corporate umbrella. Management labels its different businesses as "trusted brands combined with strong innovation", but operates two divisions that continue to see negative secular trends. It could take a decade before the housing market recovers from its bubble, and golf demand has also been weak for a few years, with little predicted improvement on the horizon. This leaves the appealing spirit business, which would ideally be freed from the corporate fold.
Unfortunately, Fortune's stock has already rallied strongly on hopes that Ackman will swoop in and make needed improvements in the business mix. At current share prices, the forward P/E is nearly 19-times this year's earnings, if Fortune hits the high end of its earnings guidance. The multiple is more reasonable when looking at free cash flow though, and could still indicate there is upside potential from current levels. (For more, see 10 Golf Tips To Help Investors Tee Off.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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