Morningstar | Fortune Brands' 4Q Results Were Hindered by Slowing Demand, but 2019 Outlook Is Solid
Fortune Brands reported fourth-quarter results that missed Wall Street's expectations as the narrow-moat rated manufacturer of home products grappled with slowing demand for home products amid housing market uncertainty. Sales during the quarter grew almost 3% year over year to over $1.4 billion but came in about $50 million shy of the consensus estimate. Adjusted EPS of $0.86 increased about 8% but missed the consensus estimate by $0.08.Despite the recent hiccup in demand, in our view, Fortune Brands' long-term prospects remain attractive. We continue to believe demographic tailwinds coupled with an undersupply of existing homes should support new residential construction growth over the coming years. Repair and remodel spending, which represents approximately two thirds of Fortune Brands' home product revenue, is much more stable than new construction and should benefit from an aging housing stock (the median age of owner-occupied homes is 37 years). While Fortune Brands' 2019 EPS guidance was below Wall Street's expectations of $3.80, we think the firm's outlook is solid. Management expects reported revenue to grow 6% to 7.5% in 2019 (3% to 5% excluding acquisitions) and EPS of $3.53 to $3.77, which implies about 9% growth at the midpoint of guidance.
We don't expect to materially change our fair value estimate after we roll our valuation model forward; however, it's possible we'll update our fair value estimate following Fortune Brands' investor meeting on Feb. 6 if the presentation prompts us to change our longer-term outlook.
Fortune Brands' recently formed doors and security business generated the strongest top-line growth during the quarter, with sales up 7% year over year to $307 million, but the segment's adjusted operating margin fell 610 basis points to 8.7%, in part due to deal costs, investments, and seasonality related to the recently acquired Fiberon. In 2019, management expects the segment will generate high-single-digit organic growth (high-teens reported growth with Fiberon) and expand operating margin by 100 basis points (versus an adjusted 13.1% operating margin in 2018).
The plumbing segment, which has doubled its top line over the course of seven years, grew sales 4% year over year to $488 million, and its adjusted operating margin expanded 150 basis points to an impressive 22.3%. Management expects the segment will grow mid to high single digits with a 21% operating margin in 2019 (in line with 2018 operating margin).
The company is repositioning its cabinets business to focus more on value price points. Cabinets segment sales were about flat with the year-ago quarter at $625 million, but up 2% excluding revenue from subsequently exited business last year. Home center in-stock and builder direct sales were up high single digits, dealer channel sales were up low single digits, and special-order cabinets sold in home centers, as well as sales in Canada, were down year over year. The segment's adjusted operating margin declined 70 basis points year over year to 10%. In 2019, management expects cabinet sales to grow 3% to 4% with a 70-basis-point improvement in operating margin (versus an adjusted 9.6% margin in 2018).
Fortune Brands Home & Security is a holding company. Through its subsidiaries, the company provides home and security products. The company's segments are: Cabinets, which manufactures cabinetry and vanities, for the kitchen, bath and other parts of the home; Plumbing, which manufactures or assembles and sells faucets, accessories, kitchen sinks and waste disposals; and Doors and Security, which manufactures and sells fiberglass and steel entry door systems, composite decking and railing, and urethane millwork, as well as manufactures, sources and distributes locks, safety and security devices, and electronic security products and fire resistant safes, security containers and commercial cabinets.
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