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Morningstar | Fortune Brands Reports Solid 1Q Results Despite End-Market Softness, Maintains 2019 Guidance

Fortune Brands Home & Security performed well during the first quarter even though its end markets grew at a more tepid pace than last year. Fortune Brands' sales grew 6% year over year (3% organically) to $1.3 billion. The company estimates repair and remodel spending was up 4% but its new-construction end markets were down low single digits. During last year's first quarter, Fortune Brands estimated 4%-5% R&R growth and mid-single-digit expansion in its new-construction markets.

We were pleased to see Fortune Brands' profit margins improve relative to the year-ago quarter. Consolidated adjusted operating margin expanded 80 basis points to 10.7%, driven by a marked turnaround in the cabinets business and corporate cost containment. While management remains optimistic that growth will accelerate during the second half of 2019, full-year sales growth and adjusted earnings per share guidance is unchanged at 6%-7.5% and $3.53-$3.77 (6%-13% growth), respectively. We've increased our fair value estimate about 3% to $62 per share, mainly due to the time value of money since our last update.

We were most impressed by the cabinets segment, which is in turnaround mode as management works to increase the segment's exposure to more attractive end markets while also cutting costs. After four consecutive quarters of declining sales (year over year), cabinets sales grew almost 3% with adjusted operating margin expanding 350 basis points to 7.8%.

Despite facing a tough prior-year comparison (16% organic growth), plumbing sales grew 2% (3.5% organically), and while plumbing's adjusted operating margin contracted 80 basis points to 19.7%, that's still a very solid level of profitability, in our view.

The doors and security business grew nearly 20% (5% excluding the Fiberon acquisition), but adjusted operating margin came in 290 basis points lower at 8.8% due to investment spending, purchase accounting, and unfavorable mix.

Management expects full-year doors and security adjusted operating margin of approximately 14% on high teens sales growth. 2019 plumbing sales are expected to grow mid- to high single digits with about a 21% adjusted operating margin. Management sees cabinets sales increasing 3%-4% in 2019 with 70 basis points of adjusted operating margin expansion.