Fortune Brands Ties Fortunes To Housing Recovery

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Fortune Brands ( FBHS ) was spun off from its namesake consumer-brands firm in 2011 to focus on home and security products, leaving its parent with a hefty liquor business under a new name,Beam Inc. ( BEAM ), after Jim Beam whiskey.

The spinoff no longer owns Jim Beam, but it does have plenty of other well-known brands under its belt, many a good fit with the rebounding new-home market.

Brands include Moen faucets, Master Lock security products, Therma-Tru entry doors, Simonton windows and Aristokraft, Omega and Kitchen Craft cabinets.

While they've been around for years, with many such as Moen and Master Lock leaders in their sector, the company itself is a lot trimmer now.

A restructuring program begun during the recession left it with 20 fewer plants and 12,000 less employees, for a total now of 37 plants and 16,000 employees.

Most are in the U.S. But about 10% of the company's faucet business is based in China, where products made there are either sold locally or shipped to the U.S.

"We can grow with our existing infrastructure," said CEO Chris Klein in a phone interview, adding that second shifts in factories can be added if needed.

Fast Profits

"So sales will go up and profits will go up a lot faster," he said.

Fortune Brands expects sales growth this year in the high-single digits, while forecasting earnings growth of 33% at the midrange ($1.18 a share) of its guidance.

Analysts' profit forecast is near the high end, at $1.22, according to a Thomson Reuters' tally.

The company's long and close ties with customers are a plus, watchers say.

"We expect the company to outperform the market in general, with sustained growth from its dealer, wholesaler channels to lead the way," wrote KeyBanc analyst Kenneth Zener in a note after Q4 results were reported last month.

Sales in the quarter rose 8% over the prior year to $948 million while earnings jumped 44% to 23 cents a share.

Management attributed gains to double-digit growth in new housing construction and moderate growth for home repairs and remodeling.

"About 30% of our business comes from new construction and that part of our business is strong," Klein said in the recent interview with IBD. "This year, it will eventually increase to 35% to 40% as the market for new homes increases."

He expects new-home starts to grow around 20% this year, about the same pace as last year.

The company's chief rival isMasco ( MAS ), Klein says, adding that Masco has a broader product portfolio, but that Fortune Brands is bigger in faucets and cabinets.

Building products' suppliers, down in the dumps during the housing slump, are doing better now that housing is on the rebound.

Besides Fortune Brands and Masco, also on the upswing are rug and tile supplierMohawk Industries ( MHK ),USG ( USG ), which makes gypsum wallboard and other building supplies, architectural window makerApogee Enterprises (APOG), decking supplierTrex (TREX) andAmerican Woodmark (AMWD), which makes kitchen cabinets and other products.

All these companies are in IBD's miscellaneous building and construction products industry group, which is ranked No. 10 out of 197.

The remodeling market, where spending is common on big-ticket items such as cabinets and windows, is still lagging, however.

Products for repairs and remodeling are discretionary purchases tied to how the broader economy is faring, Klein says.

"As consumers build savings and wealth, they'll have more to spend on discretionary remodels," he said.

About half of Fortune Brands' sales are tied to the repair and remodeling market, which Klein says is growing 4% annually. Security, storage and international sales make up the rest.

Some analysts believe homeowners will be more apt to spend on home improvements as the value of their homes rise.

CoreLogic says nationwide home prices rose 9.7% in January vs. the prior year, the biggest spike since April 2006. Excluding distressed sales, home prices grew 9%.

It expects February price gains of 9.7%, including distressed sales, or 11.3% not counting distressed sales.

Fortune Brands' plumbing division logged the highest operating income of any product category in Q4, in large part due to faucet suppliers in China, who keep fixed costs down.

Security and storage products were second, followed by kitchen and bath cabinets. Windows and doors performed the worst.

Windows And Doors

Though they were 16% of sales in 2012, windows and doors made up only 1% of profits amid weak demand for higher-ticket millwork items, noted KeyBanc's Zener.

Though Fortune Brands' Therma-Tru brand is a leader in fiberglass entry doors, its share of the market has dropped from 25% in 2003 to 16% at the end of 2012 due to stiffer competition in an "increasingly commoditized business," Zener noted.

But the company's Simonton window brand continues to gain market share by targeting the faster-growing vinyl segment, he added. Still, window and door sales rose just 1.4% in Q4 vs. the year prior, to $155.8 million.

In contrast, sales of plumbing supplies grew 15% to $296.5 million while kitchen and bath cabinetry rose 12.5% to $339.5 million.

Security and storage is "the sole segment that does not have exposure to housing," Barclays analyst Stephen Kim told clients in a report.

Products include padlocks, electronic security systems and tool storage solutions.

Sales in that segment were down 4% in Q4 to $156 million.

Management seems most excited about the ongoing housing recovery.

"The housing market is just starting to recover," Klein said. "We're in the middle of accumulating cash. Over the next 18 to 24 months as the recovery continues to build steam we'll return cash to shareholders through dividends and share repurchases and consider acquisitions."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BEAM , FBHS , MAS , MHK , USG

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