Allegion Earnings: Volumes Still Under Pressure, but Strong Margin Expansion Continues

Allegion’s ALLE reported third-quarter revenue increased 0.5% year over year to $918 million, but organic revenue slipped 0.6% as a 6.5% increase in price was offset by a 7.1% volume decline. Allegion’s Americas nonresidential business remained resilient with low-single-digit percentage sales growth, and its recently acquired access technologies business saw midteens growth. However, fewer housing starts and reduced housing turnover in the United States contributed to a low-teens percentage sales decline for the Americas residential business. Weaker sales for Allegion’s global portable security business and within the China market weighed on international segment revenue growth.

Nevertheless, Allegion enjoyed another quarter of robust margin expansion. Consolidated adjusted operating margin expanded 110 basis points to 23.2%. The Americas segment realized 140 basis points of adjusted operating margin expansion (to 28.4%) on roughly flat reported revenue, and the international segment’s 13.4% adjusted operating margin improved 180 basis points year over year despite organic revenue dipping 3% (reported revenue increased 3%).

Favorable price/cost and productivity have been primary drivers behind Allegion’s margin expansion. In our view, Allegion’s pricing power (a function of its wide economic moat) and strong execution, should support future margin expansion. Furthermore, the access technologies acquisition has had less of a dilutive effect on margin than we had expected, likely due to strong legacy margin performance. As such, we’ve increased our five-year average operating profit margin outlook by approximately 150 basis points. We’ve raised our fair value estimate 5% to $142 per share due to our more optimistic profit outlook and the time value of money.

Management maintained its 2023 sales and free cash flow guidance (5.5%-6.5% organic sales growth and $500 million-$520 million, respectively) but raised adjusted EPS midpoint guidance to $6.85 from $6.75 previously.