Fortune Brands Earnings: Solid Results Amid Softer End Markets; Acquires Brands From Assa Abloy

Considering softer repair and remodel spending and residential construction in the United States, narrow-moat-rated Fortune Brands Innovations FBIN turned in a solid second-quarter performance. Consolidated revenue declined 7% year over year, and adjusted operating margin declined 60 basis points to 17%.

More importantly, on June 20, Fortune Brands completed its 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). We had been modeling the acquisition to close at the end of the second quarter with 2023 revenue contribution of $205 million. Assa Abloy divested these assets to assuage the U.S. Department of Justice’s concerns about its acquisition of Spectrum Brands’ hardware and home improvement business (which includes the well-known Kwikset brand). See our Dec. 2, 2022, note for more details on the acquisition.

Turning back to Fortune Brands’ second-quarter results, water innovations and outdoors segment sales declined 5% and 14% year over year, respectively, as higher prices weren’t enough to offset volume declines. The security segment realized 2% sales growth due to higher prices and a growing commercial safety business. Two segments, outdoors and security, realized solid adjusted margin expansion (80 and 70 basis points year over year, respectively), but water innovations’ margin slipped 170 basis points to 23.2%, which is still very strong profitability.

Management still expects the U.S. R&R market to decline 4%-6% but now sees new single-family construction to decline 12%-14% compared with the previous outlook of a 18%-22% decline. Considering these revised expectations, management is now targeting organic sales to decline 4%-6%, with reported revenue, which includes the Assa acquisition, flat to down 2%. We’ve raised our fair value estimate 3% to $74 per share due to modestly stronger near-term profitability and the time value of money.