Allegion Reports Good Q4 Results; Commercial Business Supports Solid Growth in 2023

Following Allegion’s ALLE fourth-quarter earnings release, we’ve raised our fair value estimate by approximately 2% to $135 per share, primarily due to the time value of money. Wide-moat-rated Allegion posted another strong quarterly performance with reported revenue growing 21.5% year over year (11% organic) and adjusted operating margin expanding 310 basis points to 19.5%. Organic revenue growth was entirely due to very strong pricing (resulting in 12% revenue growth), which more than offset about a 1% sales decline due to lower volume. The July 2022 access technologies acquisition accounted for approximately 13 percentage points of revenue growth, while unfavorable foreign currency was about a 3-percentage-point headwind.

Americas segment reported revenue increased 37% year over year (18% organic) due to the access technologies acquisition, mid-20s commercial growth, and low-single-digit residential growth. We expect solid commercial growth will continue in 2023, more than offsetting a weakening residential backdrop. Management is targeting 4%-6% organic revenue growth for the Americas segment in 2023. The international segment is grappling with softening end markets, and fourth-quarter revenue declined 15% (4% excluding currency translation). These conditions are likely to persist in 2023, and management is targeting negative 2% to flat organic revenue growth.

After falling behind the price/cost curve in late 2021, Allegion has steadily made up ground and realized positive price/cost for three consecutive quarters. The Americas segment had a standout quarter from a margin expansion perspective with adjusted operating margin increasing 290 basis points to 24% (even with a 240-basis-point margin drag from the acquisition). International adjusted operating margin fell 90 basis points to 13.1%, which is still a solid level for this business compared with historical standards.