Allegion Earnings: 2023 Guidance Raised After Strong Nonresidential Sales and Margin Expansion

We think the market has become more cautious on the nonresidential construction market considering the specter of a recession and regional banking woes. However, Allegion’s ALLE Americas nonresidential business showed no sign of weakness. Indeed, nonresidential organic revenue increased roughly 30% year over year. Allegion has more exposure to institutional projects (for example, education and healthcare), so office vacancy and tighter regional banking lending is less of a concern for Allegion. Furthermore, Allegion is a late-cycle business, so a diminished pipeline of construction projects likely wouldn’t fully affect the firm for 12-24 months.

Americas residential organic revenue increased by a mid-single-digit percentage as higher net selling prices offset lower volumes. Considering our outlook for a low- to mid-single-digit decline in repair and remodel spending and over a 20% decline in housing starts this year, we expect residential sales growth will turn negative later this year or next year. However, we expect both R&R spending and residential construction to rebound in 2024. Also recall that residential is about 30% of Americas revenue and has lower margins than the nonresidential business. As such, faster growth from the nonresidential business will provide a favorable mix-shift margin tailwind for Allegion.

Excluding the access technologies acquisition, Americas organic sales growth was almost 23%, with 13% from higher pricing and 10% from more volume. Adjusted operating margin expanded a robust 290 basis points year over year to 26.7%. Without the AT acquisition (which is margin dilutive), adjusted operating margin would have expanded 500 basis points to 28.8%.

Considering this strong performance, management now sees total reported revenue growth of 11.5%-13.5% (9%-10.5% previously) and adjusted EPS of $6.55-$6.75 (versus $6.30-$6.50).

Our longer-term outlook for Allegion hasn’t changed, and we’ve maintained our $135 per share fair value estimate.