Fortune Brands Completes Cabinets Spinoff; Shares Are Attractively Priced Amid Positive Catalyst

Fortune Brands completed the tax-free spinoff of its $3.3 billion (our 2022 sales estimate) cabinets business on Dec. 14. The remaining company, comprising the water innovations and outdoors and security segments, was renamed Fortune Brands Innovations (FBIN) and the cabinets business now trades separately as MasterBrand Inc. (MBC). Investors received one share of MasterBrand common stock for each share held in Fortune Brands.

We are encouraged by Fortune Brands’ spinoff of the cabinets business. While MasterBrand serves as the largest cabinet manufacturer in the United States (we estimate 15%-20% market share), the business lacks an economic moat, in our view, due to limited product differentiation across the industry and a fragmented market. Fortune Brands is poised to deliver stronger profit margins and return on invested capital after the spinoff as the cabinets business weighed on consolidated results in previous years. We view the cabinets spinoff as a catalyst for Fortune Brands, as investors may come to appreciate the company’s higher margin and ROIC profile. However, we still view Fortune Brands as a narrow-moat business. The water innovations segment warrants a wide moat rating, in our view, driven by the ubiquitous Moen faucet brand, but we think the outdoors and security segment lacks a moat as its product portfolio of doors, security locks, and composite decking are more fungible.

Our revised fair value estimate for Fortune Brands is $78 per share. Economic uncertainty has weighed on the stock in 2022, though we believe headwinds are more than priced in. Indeed, we are encouraged by the company’s end market exposure as we believe long-term tailwinds exist in both repair and remodel and residential construction activity. Additionally, two-thirds of the company’s North American sales stem from the repair and remodel market, offering less volatility than the broader housing market.