With constant focus on solidifying its product portfolio and investing in future growth, Fortune Brands Home & Security, Inc.’s (FBHS) third-quarter 2014 adjusted earnings of 55 cents soared 19.6% year over year. However, earnings fell short of the Zacks Consensus Estimate by a penny.
Including one-time items, the company’s quarterly earnings came in at 54 cents per share, up 51.4% year over year.
Looking Deeper
Net sales advanced nearly 5% year over year to $1,097.7 million, backed by an increasing trend noticed across all segments. However, sales fell short of the Zacks Consensus Estimate of $1,158 million.
Adjusted operating income grew 14.7% to $138.2 million, while operating income margin expanded 110 basis points (bps) to 12.6%.
Segment Details
Sales at the Cabinet segment inched up 1% to $452.6 million, on the back of solid increases in dealer network coupled with introduction of new products. The segment reported a 1% dip in adjusted operating income, which came in at $36.5 million.
The Plumbing segment’s sales climbed 2% year over year to $345.9 million, supported by strength in the U.S., wholesale and retail channels, partly offset by weak international sales. Adjusted operating income for the segment jumped 15% to $76 million.
The Door segment’s sales were up 13% to $114.4 million, on the back of strength witnessed at both retail and wholesale networks. The segment’s adjusted operating income soared 61% to $12.1 million.
Sales at the Security & Storage segment escalated 17% to $184.8 million, aided by sales resulting from the SentrySafe acquisition, rise in organic security sales, partly offset by a decline in tool storage sales. However, adjusted operating income dropped 6% to $27.6 million.
Financial Details
Fortune Brands ended the quarter with cash and cash equivalents of $175.1 million, while long-term debt stood at $653.8 million. Shareholders’ equity (excluding non-controlling interests) at the quarter end was $2,337.2 million.
Going forward
During the reported quarter, the company made several investments in designing, planning and implementing additional capacity. The company aims at making continuous investments to enhance its incremental capacity in order to facilitate growth. Although these efforts will take time owing to the sluggish market growth, they are expected to facilitate substantial growth, 2015 onwards.
During the quarter, the company acquired SentrySafe and sold its Simonton windows business due to its unsatisfactory performance. Further, with the integration of SentrySafe, Fortune Brands aims at separating its tool storage business from its wider Security & Storage segment in the fourth quarter.
Guidance
Based on the assumption that the U.S. home products market will grow 4%–5% in fourth-quarter 2014, the company forecasts sales to advance roughly 8% for the year.
Additionally, adjusted earnings are expected to be in the band of $1.84–$1.86 for 2014, compared with $1.50 reported in 2013. This includes the impact of the SentrySafe acquisition, sale of Simonton windows and share buybacks.
Moreover, Fortune Brands is expected to generate free cash flow of $200 million in 2014, after excluding the impact of its expected capital expenditures of roughly $120 million slated toward investments in incremental capacity and infrastructure to support multi-year growth.
To conclude, the company anticipates to deliver solid growth for 2014 while it expects to accelerate growth in 2015.
Other Stocks to Consider
Fortune Brands currently holds a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Ethan Allen Interiors Inc. (ETH), with a Zacks Rank #1 (Strong Buy), and Restoration Hardware Holdings, Inc. (RH) and Mattress Firm Holding Corp. (MFRM), both carrying a Zacks Rank #2 (Buy).
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