Fortune Brands: Good Execution And Interest Rate Cycle Reversal Should Drive Upside

Investment Thesis - Fortune Brands Innovations, Inc. (FBIN) is expected to see upside driven by good execution, market share gains, and new partnerships in its connected product portfolio [5] - The interest rate cycle is anticipated to reverse, benefiting both new construction and repair & remodel (R&R) demand in the housing industry [5] - The company's margins are projected to improve due to favorable price/cost dynamics, an improving mix, cost savings, and volume leverage [5] - Despite a slightly higher valuation multiple than historical averages, it is justified due to the exit from lower-margin cabinet business [5] Revenue Analysis and Outlook - Recent sales were negatively impacted by channel inventory destocking and lower end-market demand due to a weak housing market [6] - In Q2 FY2024, FBIN experienced a 6.6% year-over-year increase in total revenue to $1.2 billion, although organic sales declined by 3% year-over-year [7] - The Water Innovation segment saw a 7% year-over-year sales growth, while the Security segment grew by 11.7% year-over-year, despite organic sales declines in both segments [8] Margin Analysis and Outlook - FBIN posted a 40 basis points year-over-year increase in adjusted operating margins, aided by improved margin mix and manufacturing efficiencies [12] - The Water Innovation segment's adjusted operating margin improved to 23.3%, while the Security segment saw a significant increase to 18.9% [13] - The company is expected to benefit from easing raw material costs and improved margins from connected/digital products [12][13] Valuation and Rating - FBIN stock is currently trading at 18.85x FY24 consensus EPS estimates of $4.29, which is a premium to its 5-year historical average of 16.48x but a discount to the sector median of 19.77x [14][15] - The company is expected to trade at a premium due to its higher-margin profile after spinning off its less profitable cabinet business [16] - The stock is projected to provide a good double-digit CAGR for investors, supported by double-digit EPS growth and a ~1.2% dividend yield [16]