Fortune Brands Earnings: Solid Performance Amid Softer Construction and Repair and Remodel Markets

We don’t expect to materially change our $74 per share fair value estimate following Fortune Brands Innovations’ FBIN third-quarter earnings report. The firm’s performance was largely in line with our projections, as is management’s revised 2023 outlook. And while management’s 2024 outlook struck us as cautious, we still think there’s a pathway for Fortune Brands to achieve low-single-digit percentage organic sales growth next year.

Reported third-quarter revenue increased 5% year over year to $1.3 billion, fueled by the June 20 acquisition of several brands from Assa Abloy, including Emtek and Schaub (door and cabinet hardware) and Yale and August (residential smart locks in North America). However, organic revenue declined 4% year over year as softer end markets adversely affected Fortune Brands’ water innovations and outdoor segments. Organic revenue declined 4% and 9%, respectively, for these two segments. The security segment realized 6% organic growth because of increased price and strong demand for Master Lock products in commercial and industrial end markets.

Fortune Brands’ adjusted operating margin declined 70 basis points year over year to 17.4%—a good result, in our view, especially considering lower volumes. Security segment adjusted operating margin expanded 170 basis points to 16.8%, aided by higher margins from acquired businesses. The water innovations margin fell 50 basis points to a still very strong 24.2%, and the outdoors segment margin fell 170 basis points to 14.8%, primarily because of lower door sales, which decreased by a low double-digit percentage year over year. On the other hand, decking sales grew by a mid-single-digit percentage because of market share gains in the wholesale channel.

Management now expects reported sales to decline 1% to 2% (negative 5%-6% organic) in 2023 against a global and U.S. market decline of 5.5% to 7.5%. Next year, management expects to outperform a low-single-digit percentage market contraction.