Fortune Brands Stock: Why the Death of Housing is Premature

Fortune Brands Stock: Don't Be So Quick to Call the Housing Market Dead nyse-fbhs

Fortune Brands Sell-Off is Overblown

The death spiral in the housing sector hasn’t surfaced, but if you look at the battered prices of housing supply stocks, you may think the sector has imploded.

Mortgage rates are on the rise, but they are still at attractive levels. The country is still generating over an annualized 1.2-million units in housing starts and building permits each month.

That means there will still be decent demands for doors, cabinets, windows, and other home supplies.

A mid-cap play in the housing supplies sector that has taken a beating in the stock market but may be worth a look is Fortune Brands Home & Security, Inc (NYSE:FBHS).

Fortune Brands is a diversified play, focusing on doors, plumbing, security, and cabinets. While it generates a large portion of revenues in the U.S., the company also sells in Canada, Mexico, Europe, China, and Japan, as well as other regions.

The direction of the economy is critical for Fortune Brands, but given the stock is down 41% this year, including a 27% decline over the past three months, I see some value.

The chart below shows a new 52-week low of $40.49 for FBHS stock on December 14, with a sell-off in a range high of $73.62:

Chart courtesy of

In my view, the sell-off in FBHS stock is excessive and doesn’t reflect the underlying fundamentals.

My Bullish Thesis for FBHS Stock

The first thing you will notice about Fortune Brands Home & Security, Inc is the steady growth in revenue, increasing both earnings before interest, tax, depreciation, and amortization (EBITDA) and free cash flow (FCF).

Revenues increased sequentially from 2015 to 2017.

Year Revenue (Billions) Growth
2013 $4.16
2014 $4.01 -3.46%
2015 $4.58 14.1%
2016 $4.98 8.85%
2017 $5.28 5.99%

(Source: “Fortune Brands Home & Security Inc.,” MarketWatch, last accessed December 17, 2018.)

Fortune Brands is expected to continue the positive growth trend. Revenue is expected to rise 4.9% to $5.54 billion in 2018 and 7.4% to $5.96 billion in 2019. (Source: “Fortune Brands Home & Security, Inc. (FBHS),” Yahoo Finance, last accessed December 17, 2018.)

While the growth rate appears modest, they are higher than the expectations outlined for the major bellwethers Home Depot Inc (NYSE:HD) and Lowe’s Companies, Inc.

Fortune Brands has delivered positive EBITDA for five straight years.

Year EBITDA (Millions) Growth
2013 $471.8
2014 $506.7 -7.4%
2015 $630.3 24.39%
2016 $778.2 23.47%
2017 $842.1 8.21%

(Source: MarketWatch, last accessed December 17, 2018, op cit.)

FBHS is also profitable on both a generally accepted accounting principles (GAAP) and adjusted basis, with growth in four consecutive years.

Year GAAP Diluted EPS Growth
2013 $1.34
2014 $1.62 -20.85%
2015 $1.93 19.18%
2016 $2.62 35.75%
2017 $3.03 15.65%

(Source: Ibid.)

For 2018, Fortune Brands is expected to report an adjusted $3.43 per diluted share and deliver another $3.88 per diluted share in 2019. (Source: Yahoo Finance, last accessed December 17, 2018, op cit.)

FCF is positive, with growth in two of the past four years. The fact that free cash flow more than doubled from 2013 to 2017 is impressive.

Year Free Cash Flow (Millions) Growth
2013 $201.1
2014 $126.2 -37.25%
2015 $300.7 138.27%
2016 $501.2 66.68%
2017 $435.3 -13.15%

(Source: MarketWatch, last accessed December 17, 2018, op cit.)

Analyst Take

Insiders are buying FBHS stock to the tune of 20,581 shares purchased over the past six months. (Source: Yahoo Finance, last accessed December 17, 2018, op cit.)

While there are concerns regarding the impact of higher rates on the housing market, my view is that they are overblown at this time given the strong economy and consumer base.