N ow that its $650 million merger with cabinet manufacturer Norcraft is a done deal,Fortune Brands Home & Security ( FBHS ) is looking for new acquisitions to build out its house of home products.
It’s big in cabinets, doors, faucets and security locks and safes.
What’s next on the company’s to-do list?
“We completed all the cabinet acquisitions we need; we’re very well positioned there,” Chief Financial Officer Lee Wyatt told IBD.
Fortune Brands sells more than a dozen cabinet brands for kitchens and baths to thousands of small dealers as well as home center chains such asHome Depot ( HD ) andLowe’s ( LOW ). But its top faucet in North America, Moen, could use some company, Wyatt says.
“The top 10% (in faucets) is luxury, the bottom 15% is private label. And 75% is everything in the middle, where Moen plays,” he said.
If Fortune Brands were, for instance, to add luxury faucets to its lineup, it could leverage its U.S. distribution channel and add a new brand to more than 1,000 of its Moen stores in China.
“We’re in talks with many potential targets,” Wyatt said. “Hopefully plumbing will be our next acquisition.”
Fortune Brands is a lot of things, but one common theme is its acquisitive streak.
A $1.1 Billion Spending Spree
Since it spun off from its consumer-brands namesake in 2011, leaving the Jim Beam liquor business with its former parent, now known as Beam Suntory, Fortune has spent $1.1 billion on acquisitions. It also spent $500 million on share buybacks and $200 million on dividends over that time.
Robert Wetenhall, an analyst with RBC Capital Markets, calls Fortune Brands a “best in class” home-products company, with brands that have leading market positions in all its four major categories: cabinets, plumbing, doors and personal security products.
Beside Moen, it enjoys the leading share with MasterBrand cabinets, Therma-Tru entry doors and Master Lock padlocks.
Moen has a 30% share of the faucet market in the U.S., followed byMasco ( MAS ), the maker of Delta faucets, with a share in the low 20% area, Wyatt says. Kohler is No. 3. In the more fragmented cabinet market, Fortune has a 20%-25% share, with Masco No. 2 andAmerican Woodmark ( AMWD ) No. 3, Wyatt says.
“In the cabinet industry, more than 50% of the market share comes from small local manufacturers,” he said. “We have multiple trade brands in cabinets, but brands are not as important as they are in plumbing. Many consumers don’t recognize the (cabinet) brands.
“Our real customer in the cabinet space is the kitchen designer who works in a dealer or home center,” he continued. “We don’t advertise the brands as such. Roughly 6,000 small kitchen and bath dealers drive over 50% of the demand for cabinets. Home centers are the next biggest, about one-third of industry demand.”
On the other hand, faucets and security products are marketed and advertised directly to consumers.
Windows Out, Doors In
Fortune Brands said one reason it sold Simonton Windows last September was to focus “more sharply” on its Therma-Tru entry doors.
Fortune Brands is well positioned to ride the ongoing recovery in new-home construction and home repairs and remodeling. Most of its business is in the U.S., but it also sells products in Canada, China (chiefly with Moen) and Europe (mainly with Master Lock).
Residential building in China has slowed, but Wyatt says Moen stores have “stayed strong” as units in newly developed multifamily complexes are sold. Units aren’t usually finished with plumbing fixtures.
“As they sell out units, buyers come to our (Moen) stores. They could be coming to us for several years as units are sold.”
In the U.S., Fortune Brands expects the U.S. housing market to return to a typical “steady” pace of 1.5 million home starts annually by 2018, including single- and multifamily units. That would be up from just 600,000 in 2011 and about 1.1 million this year.
But an even bigger part of the market that Fortune Brands sells into is repair and remodeling, which accounts for about two-thirds of revenue. The company sees that market, which had been lagging in recent years, growing by 5% this year and then moving to a normal rate of 5% to 6% annual growth.
“We’ve got a little more room to grow (in repair and remodeling),” Wyatt said.
Management expects U.S. home-product sales overall to see faster growth in the second half of the year than the first half, for full-year growth of 6% to 8%. But they expect the company to outperform the overall market. With Norcraft factored in, the company now sees 2015 net sales growth of 13% to 15%.
In its Q2 report on July 22, Fortune Brands raised full-year earnings guidance on the low end, to $2.03-$2.10 from $2-$2.10 previously, including an expected 4-5 cents from Norcraft. Analysts polled by Thomson Reuters forecast earnings of $2.06, for an 18% year-over-year gain, and 22% next year. Revenue this year is seen by analysts rising 15% to $4.6 billion.
Norcraft Spikes Sales
Thomson Reuters noted Q2 earnings of 59 cents beat consensus by 2 cents. The company reported second-quarter revenue up 13% to $1.17 billion. Cabinet sales jumped 18% to $550.9 million. Excluding the impact from Norcraft, which closed May 12, sales grew 8%.
Norcraft increased Fortune Brand’s presence in the dealer channel where, as analyst Kenneth Zener of KeyBanc Capital Markets noted, there is “higher-end buyer demand.”
Plumbing sales rose less, 5% to $358 million, but those products come with higher margins than cabinets.
Growth in door sales slowed from a year-ago, but margin on earnings before interest and taxes improved to 12.9% from 8.8% last year.
Security sales jumped 28% to $138.6 million, driven by the acquisition of Sentry Safe last year.
Top Ratings Among Midcaps
Despite Fortune Brands’ share-price gains since its Q2 report, RBC Capital Markets says the company “remains our best idea” for midcap investors who combine tenets of growth and value investing.
Barclays is “overweight” on the name due mainly to “a strong management team and a portfolio of industry leading brands.” KeyBanc Capital is also “overweight.” JPMorgan is neutral.
Fortune Brands is highly scored by IBD, with a Composite Rating of 96 out of a best-possible 99. Masco, which broke out on July 28 after a strong earnings report, has a Composite Rating of 96.
Acuity Brands (AYI), a lighting supplier, has a 99 rating. IBD’s Building-Construction Products group is ranked No. 8 out of 197 industry groups tracked.