Fortune Brands: Fully Re-Rated Following Its Transformation (NYSE:FBIN)

Shares of Fortune Brands Innovations (NYSE:FBIN) have shown real signs of life again since the fall, after the business saw a tougher 2023 as a result of higher interest rates.

The company has undergone a real transformation in recent times, but as growth is returning in 2024, and the positioning is sound, the valuation looks more than fair. Consequently, I see no need to get involved here, despite a nice bolt-on M&A deal announced as of recent.

Smarter Homes

Previously known as Fortune Brands – a home and security company – Fortune Brands has renamed itself into Fortune Brands Innovation back in 2022, a collection of brands which focus on connected products for the home.

Examples of end markets include connected products, water management, material conversion, outdoor living and sustainability and safety applications. With consumer electronics, climate control, energy & water control, lighting control and safety & security applications being on the increase, the smarter and better home results in a hugely addressable market for the business.

The Deerfield, Illinois business, has strong brands in its respective fields such as Moen, House of Rohl, Therma-Tru, Larson, Fiberon among others. Previously part of the business, shares of MasterBrand (MBC) were spun off late in 2022.

Despite the potential and positioning, the company has only grown from a $4.0 billion revenue base in 2014 to $4.6 billion in 2023, with sales growth not keeping up with inflation and sales down from a 2019 peak around $5.8 billion. The truth is that the company has offset the lack of growth by modest margin gains, as well as by the fact that about a quarter of the outstanding share base has been retired over this period of time.

The Base Case

In January of this year, Fortune Brands reported a 2% fall in 2023 sales to $4.63 billion. Even worse, excluding the impact of currency movements and a 53rd working week adding to 2023 results, organic sales were down as much as 6%. This comes as the housing market, and related spending at large, was impacted by higher interest of course, hurting the performance of related stocks, including Fortune.

The company largely relies on its waters business, responsible for just over half of sales. This is complemented by a $1.34 billion outdoor business which saw double-digit sales declines, in part offset by a 14% increase in security sales to $723 million.

Adjusted operating earnings were down 9% to $738 million, driving an 8% decline in adjusted earnings to $3.91 per share, with GAAP earnings down as much as 23% to $3.17 per share.

This margin pressure was painful as the company torches along about $2.3 billion in net debt, working down to a 2.5 times leverage ratio based on $910 million in adjusted EBITDA. Despite a tougher year, the company sees 2024 sales up at a midpoint of 4.5%, with adjusted earnings seen at $4.30 per share, plus or minus ten cents.

With 128 million shares trading at $82 per share, the company commands a $10.5 billion equity valuation, or near $13 billion enterprise valuation here. This values the firm at just below 3 times sales, a mid-teens EBITDA multiple, and at around 21 times adjusted earnings, which actually looks more than fair given the mediocre long-term performance.

And Now?

Bad on the 2024 outlook, the earnings multiple compresses to about 19 times earnings, still a largely fair multiple as further growth is welcomed, bust shares look largely fairly valued.

The company furthermore announced a bolt-on deal following the fourth quarter results, as Fortune Brands announced a $105 million deal to acquire SpringWell Water Filtration Systems. The provider of whole-home water filtration and softening solutions contributes an unknown sales number, but the deal looks quite compelling. Adjusted for tax benefits, a $92 million purchase piece is equivalent to just 8.5 times EBITDA which looks very compelling, but unfortunately the deal tag is equal to just nearly a percent of the enterprise valuation.

This deal will not change the investment thesis in any substantial way and with a largely fair valuation, I am not enticed to get involved with the shares, following a 50% return since the fall. This momentum is backed up by the market at large, as well as a $650 million share buyback program reported alongside the fourth quarter results, together with prospects for growth in 2024.

The truth is that Fortune Brands still has lots to prove here amidst the many moving parts, as the company has undergone a real transformation in recent years. This follows the transformative divestment of MasterBrand, its cabinet business, in part offset by bolt-on deals in its core business such as Emtek and US and Canadian Yale.

Hence, shares look interesting to keep a close eye on, but right here, I feel no urge to get involved just yet as the security product providers (among others) is not necessarily a very secure investment here.