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Fortune Brands: Market Share Gains And Swift Recovery In Housing Market Can Drive Upside

Jun. 08, 2020 9:22 AM ETFortune Brands Innovations, Inc. (FBIN)
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  • Fortune Brands' focus on entry-level demography is helping it gain market share, and the company will likely emerge stronger on the other side of the slowdown.
  • The company will also benefit from a swift recovery in housing market helped by low interest rates and increased remodeling spend due to consumers spending more time at home.
  • I believe the company can beat estimates and see ~29% upside in the next 12 to 18 months.

In normal times, when you see unemployment in low teens, it is very difficult to be positive on consumers. But, this time, it is different. With recent stimulus measures, more than two-thirds of laid-off workers are making more money than when they were employed. These measures have helped preserve consumer balance sheets, and we may see a swift recovery in consumer spending as the U.S. economy continues reopening over the next couple of months and unemployment dips. The recent correction in stock markets has made available plenty of opportunities to buy high-quality consumer companies at reasonable valuations. I am looking for companies that are executing well, gaining market share, and having a reasonably strong balance sheet to weather this recession if things go south. Fortune Brands Home & Security (FBHS) is one such name.

The company reported its better-than-expected Q1 results in April. The company's Q1 revenues grew by 5.63% to $1,402 mn versus the sell-side consensus of 2.27% growth or $1,358 mn in revenues. The company's operating margins expanded 142 bps, driven by volume leverage and cost control. Better-than-expected topline growth and margin expansion helped the company post 29% EPS growth in Q1 2020, which was much better than sell-side consensus ($0.81 actual versus $0.66 consensus). The company's plumbing sales were impacted by approximately six weeks of closure in China and unfavorable foreign exchange which decreased its sales by ~$32 mn. Sans this impact, the company's sales growth would have been ~8%. Also, COVID-19 started impacting U.S. sales in late March. While the company hasn't quantified its impact on U.S. sales, I believe, without the impact of COVID-19, the company's growth rate would have been in high single-digit to the low double-digit range.

The company is taking market share, and it will emerge much stronger on the other side of

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