Fortune Brands has historically generated consistent free cash flow

Business Strategy & Outlook

Since spinning off from its holding company Fortune Brands, Inc., in 2011, Fortune Brands Homes and Security has achieved admirable top-line growth and improved profitability. Its improved financial performance has been the result of a successful operating strategy overlaying a backdrop of strengthening new-home construction and repair and remodel, or R&R, spending. Residential construction was a bright spot during pandemic-affected 2020-21, and housing starts should remain elevated at about 1.6 million units in 2022. However, deteriorating affordability has slowed housing demand, and the project starts to decrease 10% in 2023 to 1.435 million units and decline roughly 10% in 2024 to 1.3 million units, which is about in line with new home production in 2018-19. One can expect affordability will improve over the next two years as mortgage rates subside and home price appreciation returns to its 4% long-term trendline. The project will rebound to 1.55 million units by 2026 and average around 1.45 million units toward the end of the decade.

R&R spending surged during the pandemic, but one cannot expect a dramatic downturn in home improvement projects, although the amount spent per project could moderate over the near term, resulting in flattening growth over the next couple years. Historically, project incidence has been relatively stable, but average project expenditure is more sensitive to macroeconomic conditions. Nevertheless, continue to see a 4%-5% long-term growth trajectory for R&R spending bolstered by several secular tailwinds related to aging housing stock, favorable demographics, and increased acceptance of smart home and energy-efficient products and solutions. Fortune Brands has historically generated consistent free cash flow. Since stand-alone cash flow data has been available, the company has posted 16 straight years of positive free cash flow, and that trend continues, supporting future acquisitions and shareholder distributions.

Financial Strengths

The Fortune Brands has a sound balance sheet, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. As of first-quarter 2022, Fortune Brands had approximately $3.4 billion of outstanding debt and $378 million of cash, which equates to a net debt/2022 estimated EBITDA ratio of about 2.1. Fortune Brands’ debt balance consists of outstanding debt on its $1.25 billion revolving credit facilities, $600 million of 4% five-year senior notes due in September 2023, $500 million of 4% 10-year senior notes due in June 2025, $700 million of 3.25% 10-year senior notes due in September 2029, $450 million of 4.00% 10-year senior notes due in March 2032, and $450 million of 4.50% 30-year senior notes due in March 2052. Fiscal 2006 is the first-year stand-alone cash flow statement data available for Fortune Brands Home & Security, and 2021 marked the 16th consecutive year the company has generated positive free cash flow. Since 2006, the company has posted an average free cash flow conversion rate of over 100% and a 7% average free cash flow/sales ratio. The company’s ability to generate consistent free cash flow, even in a downturn, demonstrates the durability of Fortune Brands’ business model.

Bulls Say

The R&R market is poised for long-term growth, driven by several secular tailwinds, including the aging housing stock and favorable demographics.

Fortune Brands has a robust acquisition pipeline, and future acquisitions could help the company achieve stronger sales growth.

Fortune Brands’ consolidated profitability and ROIC will improve after it spins off its less competitively advantaged cabinets business.

Company Description

Fortune Brands Home & Security is a leading home and security products company that operates three segments. The company’s $2.9 billion (fiscal 2021) cabinets segment, which will be spun off in early 2023, sells cabinets and vanities under the MasterBrand family of brands. The $2.8 billion plumbing segment, led by the Moen brand, sells faucets, showers, and other plumbing fixtures. The $2.0 billion outdoors and security segment sell entry doors under the Therma-Tru brand name, Fiberon-branded patio decking, and locks and other security devices under the Master Lock and SentrySafe brand names.

(Source: Morningstar)

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