Morningstar | Fortune Brands Maintains Full-Year 2019 Guidance Despite Tepid 1Q End-Market Growth
Since spinning off from its holding company in 2011, Fortune Brands has achieved admirable top-line growth and improved profitability. Its improved financial performance is the result of a successful operating strategy overlaying a backdrop of improving new-home construction and repair and remodel, or R&R, spending. From a strategy standpoint, Fortune Brands introduced a balanced capital-allocation plan, with acquisitions a key component. The company has made a handful of acquisitions since 2011 that have strengthened its product portfolio and competitive positioning and supplemented its growth trajectory. The company also sold its underperforming windows business, expanded its more profitable cabinets dealer network, continues to build its plumbing business in China, and remains focused on product innovation, which supports the pricing power of many of its brands. Fortune Brands’ acquisition pipeline remains robust, and we expect several more deals in the coming years, particularly in its most profitable plumbing segment.The housing market continues to recover from the 2009 bottom, albeit at a measured pace. We believe favorable demographics should support a continued gradual housing recovery, with housing starts reaching over 1.4 million units by 2025. In an improving housing environment, we think R&R spending can grow at a steady 4% to 5% annual rate. Nearly two thirds of Fortune Brands' home segments' sales are generated from R&R spending, while the rest comes from new construction, so the company should benefit from increased demand over at least the next several years. In such an environment, we see favorable product mix, pricing power, and increased operating leverage as key drivers of higher margins.Fortune Brands has historically generated consistent free cash flow. Since stand-alone cash flow data has been available, the company has posted 13 straight years of positive free cash flow, and we expect that trend to continue, supporting future acquisitions, the dividend, and opportunistic share repurchases.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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