We are maintaining our long-term Neutral recommendation on Fortune Brands Inc. (FO) with a target price of $66.
Fortune plans to split its three operational segments into separate entities. The company is looking for a tax-free spin-off to shareholders of its Home and Hardware business while exploring the sale or tax-free spin-off of its Golf business. This will help the company to maximize long-term value for shareholders by separately focusing on each business.
Additionally, Fortune Brands has taken initiatives to boost cash flow through prudent working capital management and divestment of non-core product lines. Consequently, the recent divestment of local brands in Germany and Cockburn’s Port brand provides the company greater flexibility to pursue opportunities in its core businesses.
Besides divestitures, the company has fully acquired the El Tesoro tequila brand and also secured the distribution rights of Thatcher’s Organic Liqueurs in a move to enhance its brand portfolio. Moreover, with the current addition of Skinnygirl to its brand portfolio, the company will add more consumers and build a strong platform for future growth.
On the flip side, in spite of stable economic conditions worldwide, the company’s customers remain sensitive to macroeconomic factors, including interest rate hikes, increases in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending and, in turn, the company’s growth and profitability.
The company faces intense competition from well-established players in the market such as Diageo plc (DEO) and Brown-Forman Corporation (BF.B) in its spirits business and Masco Corporation (MAS) in its home and hardware business.
Also, distilled spirits are subject to an excise tax in various countries. Rising fiscal pressure in the U.S., Europe and many emerging markets may increase the risk of a potential excise tax on spirits by governments. The effect of any excise tax increase in future may have an adverse impact on Fortune’s financial performance.
Fortune has a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock.
Fortune Brands is a leading player in the North American home and security products industry and also operates one of the largest premium spirits businesses in the world. The company possesses a portfolio of well-established brands, such as Moen, Master Lock, Therma-Tru and Simonton in home and security products; Jim Beam, Sauza and Maker’s Mark in spirits; and Titleist and FootJoy in golf products. This offers a unique competitive edge to the company.
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FORTUNE BRANDS (FO): Free Stock Analysis Report
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