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Morningstar | Allegion's 1Q Highlights: 6% Organic Growth and Margin Expansion Across All Three Segments

After a strong first quarter, wide-moat-rated Allegion remains on track to deliver on its 2019 financial goals (5% to 6% sales growth and 6% to 9% adjusted EPS growth). Sales grew 7% (6% organic) to $655 million, in line with the consensus estimate. A 10-basis-point improvement in adjusted operating margin to 17.1%, a slightly lower tax rate, and a lower share count contributed to 10% adjusted EPS growth to $0.88, which beat the consensus estimate by a penny. After reviewing Allegion's first-quarter results, we didn't materially change any of our key valuation drivers; however, the time value of money since our last update increased our fair value estimate about 1% to $97 per share.

Americas segment sales increased 8% (both reported and organic) to $475 million, driven by low-double-digit nonresidential growth that was dragged down by flat residential growth. Electronic products grew 10% during the quarter, and management expects stronger electronics growth over the rest of 2019. We continue to see electronic product penetration across both nonresidential and residential markets as a key long-term growth driver for Allegion. Americas adjusted operating margin expanded 10 basis points to 25.9% as positive price, operating leverage, and productivity gains more than offset investment spending.

The Europe, Middle East, India, and Africa segment faced foreign currency translation headwinds that resulted in a 5% decline in sales. Excluding currency, EMEIA sales grew almost 2% to $143 million. The segment's adjusted operating margin expanded 220 basis points to 8.2% due to the same drivers that benefited Americas segment margins.

Asia-Pacific segment sales increased 55% on a reported basis to $37 million due to the Gainsborough acquisition, which closed in July 2018. Excluding this acquisition and a $1.5 million internal revenue transfer, organic sales increased about 4%. The segment's loss narrowed to $0.7 million versus $1 million last year (adjusted).