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Bank of America Merrill Lynch Rated Fortune Brands as a ‘Buy’

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Price movement

Fortune Brands Home & Security (FBHS) has a market cap of $9.3 billion. It rose 0.81% to close at $58.67 per share on September 23, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 4.6%, -7.0%, and 6.6%, respectively, on the same day. FBHS is trading 2.9% below its 20-day moving average, 4.9% below its 50-day moving average, and 5.0% above its 200-day moving average.

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Related ETF and peers

The iShares Russell 3000 ETF (IWV) invests 0.04% of its holdings in FBHS. The ETF tracks a cap-weighted index that measures the investable US equities market, covering the entire market-cap spectrum, including micro-caps. The YTD price movement of IWV was 7.9% on September 23.

The market caps of FBHS’s competitors are as follows:

  • Stanley Black & Decker (SWK) — $18.4 billion
  • Masco (MAS) — $11.6 billion
  • Spectrum Brands Holdings (SPB) — $7.9 billion

FBHS’s rating

Bank of America Merrill Lynch has initiated the coverage of Fortune Brands Home & Security with a “buy” rating and set the stock’s price target at $70 per share.

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Performance in 2Q16

Fortune Brands reported 2Q16 net sales of $1.3 billion, a rise of 8.3% over its net sales of $1.2 billion in 2Q15. Sales from cabinets, plumbing, doors, and security rose 17.1%, 5.7%, 8.7%, and 5.8%, respectively, between 2Q15 and 2Q16. The company’s cost of products sold as a percentage of net sales fell 2.1% and its operating income rose 46.4% in 2Q16.

Fortune Brands’ net income and EPS (earnings per share) rose to $125.2 million and $0.80, respectively, in 2Q16, compared with $79.7 million and $0.48, respectively, in 2Q15. It reported adjusted EPS of $0.82 in 2Q16, a rise of 39.0% from 2Q15.

Fortune Brands’ cash and cash equivalents and inventories rose 16.9% and 4.5%, respectively, between 4Q15 and 2Q16. Its current ratio and debt-to-equity ratio rose to 2.1x and 1.2x, respectively, in 2Q16, compared with 1.9x and 1.0x, respectively, in 4Q15.

Projections

The company made the following projections for 2016:

  • sales growth of 10%–12%, based on a rise in sales from its Norcraft acquisition and its expectation of outperforming the market
  • EPS (before charges and gains) of $2.70–$2.78
  • free cash flow of ~$400 million

In the next part, we’ll take a look at Packaging Corporation of America (PKG).

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