Morningstar | Fortune Brands to Acquire Decking, Railing, and Fencing Manufacturer for $470 Million
Fortune Brands announced that it has agreed to acquire Fiberon, a $200 million manufacturer of outdoor decking, railing, and fencing products, for $470 million. Management expects the deal to close within 30 days, at which point, Fiberon will be included in Fortune Brands' newly formed doors and security segment (these two segments had previously operated autonomously). We've raised our fair value estimate to $67 per share from $66; we think Fortune Brands paid a fair price for a business with high growth potential and attractive margins.According to Fortune Brands, Fiberon operates in a $2.5 billion decking market, and the capped composite nonwood market subsegment, where Fiberon is focused, represents about a quarter of the decking market and has been growing about 10% annually. In late July, Fortune Brands announced the combination of its doors and security segments to accelerate growth and realize better economies of scale. This acquisition should certainly help the doors and security business achieve its top-line growth targets.
Fortune Brands expects the acquisition to add $0.05 to $0.06 to EPS in 2019 and $0.09 to $0.10 in 2020. We think the EPS delta between 2019 and 2020 will be the result of Fortune Brands' ability to improve Fiberon's penetration across builder, wholesale, and home center channels. Indeed, the company noted to us that the Fiberon acquisition is mostly a revenue synergy story rather than a cost take-out story.
Based on our follow-up conversation with the company, review of publicly traded peer Trex, and our modeling work, we estimate that Fortune Brands' $470 million purchase price equates to about 11 to 13 times Fiberon's trailing 12-month EBITDA and about 9.5 to 10.5 times Fortune Brands' expectations for Fiberon's 2019 EBITDA. For the sake of comparison, Trex currently trades at approximately 26 times and 21 times the firm's trailing 12-month and 2019 consensus EBITDA, respectively.
Fortune Brands had $345.5 million of cash on hand at the end of June, but approximately 80% of this cash is held at foreign subsidiaries. As such, we expect Fortune Brands will fund this acquisition with debt. Given that Fortune Brands currently has a reasonable net debt/trailing 12-month EBITDA ratio of about 2.1, and the firm consistently delivers strong free cash flow, we're not concerned with Fortune Brands taking on debt to fund this acquisition.
Fiberon mainly competes with publicly traded Trex and privately owned Azek. As noted in Trex's 2017 10-K, the company has leading market share in wood-alternative decking and railings. Fiberon is the second-largest player in the capped composites nonwood market. In 2017, Trex generated $565 million of revenue versus Fiberon's $200 million. Over the past five years, Trex has grown its top line at a 13% compounded annual growth rate, and its EBITDA margins have averaged over 21%. We think Fiberon's top line can grow at a mid- to high-single-digit pace, with adjusted EBITDA margins exceeding 20% in 2020.
Fiberon has 475 employees, with operations in Idaho and North Carolina.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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