Fortune Brands Prepares to Navigate Challenging End Markets in 2023

After revisiting Fortune Brands Innovations’ FBIN 2023 outlook and rolling our valuation model forward, we’ve lowered our fair value estimate approximately 8% to $72 per share. Our downward-revised near-term financial outlook and higher share count are the primary factors behind our fair value reduction. Nevertheless, we still view shares as undervalued.

Demand for new and existing homes in the United States has slowed considerably amid challenging housing affordability conditions. The repair and remodel market is less cyclical than new residential construction, but R&R spending is beginning to slow, likely due to a multitude of factors including, decreased housing turnover, persistently high inflation, and less consumer confidence. Furthermore, we believe there was a pull forward of projects during the pandemic-era R&R boom.

Considering this backdrop, Fortune Brands’ management sees the U.S. residential construction market down 18%-22% and the R&R market down 4%-6%. Because the company’s North American business is more exposed to the R&R market (67% of North American sales), management expects consolidated revenue to decline 5%-7% in 2023 with 25%-30% decremental operating leverage.

We’ve increased our Morningstar Uncertainty Rating to High from Medium because we think the more uncertain operating environment warrants a wider margin of safety for the stock. Our Uncertainty Rating change was also informed by a quantitative methodology to help calibrate our fundamentals-based assessments of uncertainty across a broad universe of stocks.

Our financial projections assume Fortune Brands completes its acquisition of select security businesses from wide-moat-rated Assa Abloy in the second half of 2023. Assa is selling these businesses in hopes of assuaging Department of Justice objections to its proposed acquisition of Spectrum Brands’ hardware and home improvement business (HHI), which owns the prominent Kwikset brand among others.