We See a Long Growth Runway for Allegion’s Seamless Access Strategy

Business Strategy & Outlook

Allegion, a global leader in security products and solutions, was spun off from Ingersoll-Rand in December 2013. No longer forced to compete for capital from a conglomerate parent, Allegion is now able to employ a more robust acquisition strategy to expand its scale, technological capabilities, and product portfolio. At over 70% of sales and 80% of segment profitability, Allegion’s Americas segment is the firm’s largest and strongest business, with a leading position in locks, exit devices, and door controls. The Americas business has been the key driver of Allegion’s stable, industry-leading profitability, which is a testament to the firm’s market position and pricing power. the Americas business to post mid-to-high single-digit organic growth after the coronavirus-fueled downturn in 2020-21 as the segment capitalizes on increased retrofit and upgrade spending across commercial and residential end markets that is drive by the convergence of electronics and mechanical security solutions, elevated U.S. residential construction, and strategic acquisitions. The segment’s already strong profit margins should benefit from a mix-shift to higher-priced electronics products and operating leverage on increased volumes, partially offset by structurally lower profit margins from the acquired access technologies business.

The company’s international businesses are subscale, which factors into the segment’s weak margin performance relative to Allegion’s strong Americas segment; however, the company is working diligently to keep strengthening these businesses through restructuring, channel development, and strategic acquisitions that build scale and expand the company product portfolio. These initiatives appear to be working as the international segment reported record profitability in fiscal 2021 (11% adjusted operating margin). The international segment profitability will continue to improve as these initiatives take hold. Like the Americas segment, this segment should also benefit from the convergence of electronic and mechanical security technology.

Financial Strengths

As part of the spinoff transaction in 2013, Allegion paid a $1.3 billion one-time dividend to Ingersoll-Rand. Allegion issued a commensurate amount of debt in 2013 to fund the dividend to its former parent. Since then, Allegion’s gross debt/EBITDA leverage ratio has improved to approximately 2.0 currently. Management continues to target an investment-grade rating on its debt going forward.

Allegion has approximately $1.4 billion of outstanding debt, which consists of approximately $250 million outstanding on the company’s term facility, $400 million of 3.2% senior notes due in 2024, $400 million of 3.55% senior notes due in 2027, and $400 million of 3.5% senior notes due in 2029. In 2021, Allegion incurred about $50 million of net interest expense and generated approximately $618 million of adjusted EBITDA, which equates to a comfortable EBITDA coverage ratio of about 12 times. The Allegion’s use of leverage is reasonable, and the company’s free cash flow generation should comfortably support its debt service requirements and future capital allocation decisions. Given the firm’s reasonable use of leverage and consistent free cash flow generation, the Allegion’s financial health is satisfactory.

Bulls Say

Allegion’s strong market position and pricing poourr in North America should continue to support the firm’s stable, industry-leading profitability.

The convergence of electronic and mechanical security products and increased infrastructure spending should drive sales growth and margin expansion opportunities.

Allegion generates strong free cash flow and is a balanced capital allocator. The company can continue to use its free cash flow to increase its dividend, repurchase shares, and make value-accretive acquisitions and invest in lead-edge technology ventures.

Company Description

Allegion is a global security products company with a portfolio of leading brands, such as Schlage, von Duprin, and LCN. The Ireland-domiciled company was created via a spinoff transaction from Ingersoll-Rand in December 2013. In fiscal 2021, Allegion generated 68% of sales in the United States. The company mainly competes with Swedish-based Assa Abloy AB and Switzerland-based Dormakaba.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.