Fortune Brands Lacking Security

By Ryan C. Fuhrmann | February 07, 2012 AAA

Fortune Brands Home & Security (NYSE:FBHS) owns a number of leading brands, including Master Lock locks, MasterBrand cabinets and Moen faucets. At the current share price valuation, investors are placing a substantial premium on these brands, as they may impede the ability for shareholders to make money in the stock over the long haul. The same can be said for other industry operators.

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Full-Year Recap
Total sales improved 2.9% to $3.3 billion. Three of four operating segments reported healthy top line gains, led by a 7% boost at the security and storage unit to $556.6 million, or almost 17% of total sales. The kitchen and plumbing units each reported solid mid-single digit sales to account for 38 and 29% of sales, respectively. Windows and door systems was the only laggard, with sales falling 8% to about 16% of total sales.

A $90 million asset impairment charge sent operating income into negative territory at $11.5 million, down from close to $200 million in 2010. Reported net income was negative at $32 million, or negative 21 cents per diluted share. Backing out the non-cash charge, the company estimated $149.5 million in operating income and 58 cents in earnings per share, which was down 20.5% from last year. Free cash flow, a better measure of Fortune's underlying capital-generating capabilities, jumped 46% to $121.4 million, or approximately 47 cents per diluted share. (To know more about income statements, read Understanding The Income Statement.)

For 2012, Fortune expects growth in the mid-single digits, or slightly above the 3% it expects for the new housing construction and home repair and remodeling markets to grow for the year. It projects recurring earnings between 66 cents and 74 cents and free cash flow of $145 million to $180 million, or roughly in a range of 56 cents and 70 cents per diluted share.

The Bottom Line
It's great to see Fortune reporting respectable sales growth after an extremely depressed period of minimal new home construction and malaise on the part of consumers in spending to repair and remodel their existing homes. Profitability, at least from a cash flow perspective, also looks to be steadily improving.

However, from a valuation perspective, the stock looks quite expensive. At a recent share price of $19, Fortune is trading at a forward P/E of nearly 20. The forward free cash flow multiple is even more lofty at 27.5, and both of these multiples assume the company hits the high end of its guidance ranges.

Rival Masco (NYSE:MAS) also looks extremely lofty at more than 41 times earnings projections for the year. Similarly, gypsum wallboard and cement manufacturer Eagle Materials (NYSE:EXP) trades around 30 times forward expectations. Rival USG (NYSE:USG) is still reporting earnings losses, as is cement giant Cemex (NYSE:CX).

A number of housing analysts are predicting a recovery in 2012, but the numbers still don't look very encouraging. The best course of action for investors may be to wait on the sidelines until more tangible signs of a housing rebound start to take hold. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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