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Morningstar | Acquisitions and Strong Demand for Electronic Products Fuel Allegion's Excellent 3Q Revenue Growth

Allegion's excellent top line growth was the highlight of the company's third-quarter earnings release, in our view. The wide-moat security products company reported 17% revenue growth (8.5% organic), which was driven by robust electronic products volume, strong price realization, and acquisitions. Allegion's revenue growth was broad-based as all three of Allegion's segments reported organic revenue growth. A key element of our investment thesis is our belief that the continued market penetration of electronic security products in both residential and commercial markets will drive strong growth for Allegion over the foreseeable future as current penetration rates are quite low. That theme really appears to be taking hold as Allegion's Americas segment saw a 30% increase in electronic products volumes year over year. We were pleased with Allegion's strong price realization during the quarter as well; price increased 2% year over year and helped offset cost inflation. We think Allegion's ability to take price is indicative of the firm's brand equity and pricing power. We've raised our fair value estimate about 2% to $93 per share, mainly due to the time value of money since our last update.

Allegion's adjusted operating margin fell 140 basis points year over year to 20.9% however, excluding recent acquisitions, which had a dilutive effect on margins but accretive to earnings, Allegion's adjusted operating margin was flat relative to the year-ago quarter. We think the margin drag from recent acquisitions will begin to subside a bit as these businesses settle into Allegion's operating model.

With a strong third quarter under its belt and a positive market outlook, management raised it 2018 full-year revenue and EPS guidance. The firm now expects to grow sales 13% to 13.5% (5% to 5.5% organic) and to generate an adjusted EPS of $4.43 to $4.50. We're projecting Allegion achieving the top-end of its guidance.

Allegion's Americas segment (75% of total third-quarter revenue and 94% of third-quarter segment operating income) increased sales 16.5% (10% organic) year over year. Excluding acquisitions, the segment reported low-double-digit growth in the nonresidential market and high-single-digit growth in the residential market. Management notes that U.S. end markets remain healthy with notable strength in the institutional nonresidential market. Americas adjusted operating margin fell 130 basis points year over year to 29.1% due to the margin-dilutive effect of acquisitions and investment spending.

The Europe, Middle East, India, and Africa segment grew revenue over 7% year over year (over 3% organic). Management noted strength from electronic products across these markets as well. EMEIA adjusted operating margin declined 50 basis points year over year to 7.6% as cost inflation, investments and the margin-dilutive effect of acquisitions more than offset pricing gains.

The Asia-Pacific segment reported a 61.5% increase in revenue year over year, but this eye-popping growth was mostly the result of the acquisition of GWA Door and Access Systems, which closed in July. Excluding the contribution from GWA, Asia-Pacific revenue grew about 6%. The segment's adjusted operating margin declined 80 basis points year over year to 6.8% due to investment spending and unfavorable mix.