Allegion plc Ordinary Shares (ALLE), a leading provider of security products and solutions for homes and businesses, reported dismal second-quarter results, as both earnings as well as revenues missed the Zacks consensus Estimate.
Adjusted earnings of 61 cents per share missed the Zacks Consensus Estimate as well as the prior-year quarter figure of 64 cents by 4.7%. The downside reflects lower-than-expected revenues and weak margins.
Quarterly revenues of $531.5 million missed the Zacks Consensus Estimate of $544 million by 2.3%. In our view, the slowdown in the U.S. housing market in the second half of 2013 and early 2014 hurt the company’s revenues in the quarter.
Allegion primarily relies on the commercial and residential construction and remodeling markets which has been tepid of late.
However, adjusted revenues rose 4% year over year. The increase was primarily due to strong residential volume in international markets and modest commercial volume growth which offset the unfavorable timing of Asia Pacific system integration projects.
However, revenues were up 2.9% on an organic basis.
Margins
Adjusted operating margin was 19.1%, down 50 basis points year over year. The decline reflected increased investments, inflation and one-time bad debt adjustment in Asia Pacific, which were partially offset by favorable price, currency exchange and productivity.
Restructuring in Europe, Middle East, India and Africa (EMEIA)
In the second quarter of 2014, management announced its plans to restructure the EMEIA segment to improve its operational efficiencies and the cost structure. In keeping with this, the company incurred severance and other restructuring charges of $4.4 million in the quarter. Out of this, $1.0 million is recorded in cost of goods sold and the remaining $3.4 million is recorded in selling and administrative expenses.
Share Repurchase
During the second quarter of 2014, the company repurchased approximately 0.6 million shares for approximately $30.3 million, under its $200 million share repurchase program.
Outlook
Allegion continues to forecast full-year revenues to increase 3.5% to 4.5% year over year on an adjusted basis.
The company has, however increased its adjusted earnings per share guidance, and expects it to range between $2.30 and $2.40, up from the previous guidance of $2.25 to $2.40 per share. Restructuring and spin-off costs are expected in the range of 25 to 30 cents per share. Including these costs, earnings per share for 2014 continuing operations are expected to be in the range of $2.00 to $2.15.
The forecast includes a full-year tax assumption of roughly 30% for continuing operations. The updated forecast assumes the official exchange rate for the Venezuelan bolivar but does not take into consideration the impact of potential currency devaluation in Venezuela.
Our Viewpoint
We are encouraged by Allegion’s strong and diverse brand portfolio and leading market share position. Further, the company is trying to improve long-term results by focusing on opportunistic acquisitions, brand support via strong advertising, regular innovations and strong cash generation. However, the recent sluggishness in the housing market in the U.S. may hurt demand for Allegion’s products and services in the near future. Also, the global macroeconomic uncertainties remain a concern.
Allegion currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include Brady Corp. (BRC), Net 1 Ueps Technologies Inc. (UEPS). Both these stocks carry a Zacks Rank #2 (Buy). However, in the broader industrial products sector, Caterpillar Inc. (CAT), which also sports a Zacks Rank #2, can also be considered.
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