Fortune Brands' (FBHS) Growth Prospects Solid, Runs Risks

We issued an updated research report on Fortune Brands Home & Security, Inc. (NYSE:FBHS) on Jun 27. Though the company boasts strong growth prospects in the near and long term, we believe that exposure to headwinds might restrict its growth momentum in the quarters ahead. It currently carries a Zacks Rank #3 (Hold).

In the last three months, Fortune Brands’ shares yielded a return of 7.50%, outperforming the gain of 3.02% recorded by the Zacks categorized Protection Safety Equipment & Services industry. We believe that impressive first-quarter 2017 results, with an earnings surprise of 15.22% and the company’s expectations for 2017 primarily drove the share price higher.

Driven by its first-quarter results, healthy product demand and favorable tax rate expectations, Fortune Brands raised its 2017 earnings guidance to $3.00–$3.12 per share from the earlier projection of $2.95–$3.05. It anticipates the U.S. home products market to grow 6–7% in 2017 while the global market is expected to rise 5–6%. Management predicts sales growth to be in a band of 6–8% in the year.

Additionally, Fortune Brands is committed toward making bolt-on acquisitions for the development of its core segments as well as creation of new platforms. For instance, the company acquired Canada-based premium showroom brand, Riobel and California-based luxury brand, ROHL in 2016. These buyouts added roughly $110 million in revenue generating capacity to Fortune Brands.

Fortune Brands constantly makes investments to develop new products and improve its services. In 2016, the company’s premium brands like MasterBrand Cabinets, Moen and Master Lock, expanded their product offerings by launching various innovative new products. Also, it formed a strategic platform – the Global Plumbing Group – to accelerate growth opportunities in its plumbing business. Moreover, the company has a sound track record of rewarding its shareholders through lucrative dividend payments and share buybacks. In Mar 2017, its board of directors authorized $300 million share buyback program, while its quarterly dividend rate was increased 13% in December last year.

Despite these positives, we believe that Fortune Brands faces risks from its high debt levels. Exiting first-quarter 2017, its long-term debt was roughly $1.5 billion, reflecting 4.2% sequential growth. We believe that a rise in the debt level, if unchecked, will increase the company’s financial obligations and hence hurt profitability.

Fortune Brands’ geographical expansion has exposed it to risks from adverse movement in foreign currencies and geo-political issues. In addition, the company’s businesses are highly dependent on the housing market, especially home improvement, repair and remodel, and new home construction activity levels in North America. We believe that lower level of housing activities and difficult financial conditions in countries where the company operates, will adversely hurt its financials.

Moreover, Fortune Brands faces stiff competition from other players in the industry, including Lakeland Industries, Inc. (NASDAQ:LAKE) , Ituran Location and Control Ltd. (NASDAQ:ITRN) and MSA Safety Incorporated (NYSE:MSA) . While Lakeland Industries sports a Zacks Rank #1 (Strong Buy), both Ituran Location and Control and MSA Safety Incorporated carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lakeland Industries’ earnings estimates for fiscal 2018 and fiscal 2019 were revised upward in the last 60 days. Also, the company’s average earnings surprise for the last four quarters was a positive 49.26%.

Ituran Location and Control’s earnings estimates for 2017 improved over the past 60 days.

MSA Safety Incorporated’s average earnings surprise for the last four quarters was a positive 7.77%. Its earnings estimates for 2018 improved in the last 60 days.

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