Illinois based Fortune Brands Inc. (FO), one of the leading diversified consumer products company that caters to a wide array of products ranging from home and hardware to premium spirits and golf equipment, recently posted its first-quarter 2011 results.
The street analysts had over a week to ponder on the news. In the subsequent paragraphs, we will cover the recent earnings announcement, analysts' estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.
Quarterly Review
On May 05, 2011, Fortune Brands reported robust first-quarter 2011 results. The company's adjusted earnings of 59 cents a share for the reported quarter beats the Zacks Consensus Estimate of 51 cents and rose 20.4% from the prior-year quarter. Earnings, on a GAAP basis, were 52 cents per share compared with 47 cents per share posted in the year-ago quarter.
Higher volumes, new spirits distribution agreement in Australia and favorable currency translations helped the company to report better-than-expected first-quarter 2011 results. However, gains from these items were partially offset by higher commodity costs, divestitures and increased investment in brand creation.
Net sales during the reported quarter grew 8.1% year over year to $1,757.4 million and came well ahead of the Zacks Consensus Estimate of $1,618.0 million. Fortune Brands' adjusted operating income jumped by 10.1% to $177.3 million and operating margin accordingly increased by 20 basis points to 10.1%.
Management Guidance for 2011
The company expects to sustain its growth momentum into fiscal year 2011. Fortune Brands anticipates earnings to grow in the range of high-single-digit to high-teens despite higher commodity costs and investments to support long-term growth.
Besides, management expects the second-quarter results to face challenging comparisons against 2010 results. Moreover, management believes that natural disaster in Japan and sale of Cobra in 2010 will affect the second-quarter results by 5 cents.
(Read our full coverage on this earnings report: Fortune Brands Beats Estimates)
Agreement of Analysts
Estimate revision trends for the upcoming second and third quarter of fiscal 2011 portrayed negative sentiments among most of the analysts covering the stock. Over the last 7 days, 4 out of 13 analysts covering the stock revisited their estimates and all have downgraded their estimates for the second quarter of 2011. Moreover, for third-quarter 2011, 5 analysts revisited their estimates, of which 3 downgraded and 2 upgraded their estimates in the last 7 days.
However, estimate revision trends for fiscals 2011 and 2012 portrayed positive sentiments among most of the analysts covering the stock. In the last 7 days, 5 analysts revisited their estimates for fiscal 2011, of which 4 adjusted it in upward direction while only one analyst has downgraded it. Similarly, for fiscal 2012, 4 analysts revisited their estimates, of which 3 analysts have upgraded and only one has downgraded in the last 7 days.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Fortune Brands depicts a pessimistic analyst outlook for the second quarter of 2011, while for third-quarter 2011 analysts have a neutral outlook. Over the last 7 days, estimates for second-quarter 2011 have been decreased by 3 cents to $1.01 while for third-quarter 2011 estimates remains constant at 89 cents per share.
Similarly, the magnitude of estimate revisions for Fortune Brands depicts an optimistic analyst outlook for fiscal 2011 and a pessimistic analyst outlook for fiscal 2012. Over the last 7 days, estimates for fiscal 2011 have been increased by 1 cent to $3.25 while decreased by 2 cents to $3.76 per share for fiscal 2012.
Our Recommendation
Fortune has planned to split its three operational segments into separate entities. The company is looking for a tax-free spin-off of its Home and Hardware business to shareholders 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. Moreover, it 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. Apart from this, in a move to enhance its brand portfolio, the company has fully acquired the El Tesoro tequila brand and also secured the distribution rights of Thatcher's Organic Liqueurs. Moreover, with the current addition of Skinnygirl to its brand portfolio, the company will add more consumers and would build a strong platform for future growth.
However, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by governments of respective countries. The effect of any excise tax increase in future may have an adverse effect on Fortune's financial performance.
Besides, 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. Fortune Brands also encounters competition from Nike Inc. (NKE) in the golf business. Further, global competitive conditions have also been intensified. Consequently, risk associated with operating in such a competitive environment may undermine the company's future operating performance.
Currently, Fortune Brands has a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock. Besides, the company retains a long-term 'Neutral' recommendation.
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