JUNE 16, 2003
FOCUS STOCK
By Howard Choe
Fortune Brands: More Than Just Lucky | Its well-known brands, such as Moen faucets and Jim Beam bourbon, make it a solid company with what looks like an undervalued stock
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With interest rates at the lowest levels in nearly four decades, Americans have purchased new homes -- and remodeled existing dwellings -- at a frantic pace. And that has been a boon for Fortune Brands (FO ). With consumers focusing their home investments in kitchen and bathrooms, Fortune's Moen faucets and cabinet lines (which include such well-known names as Aristokraft) should continue to see strong demand.
A strong position in kitchen and bath products -- and several other markets -- is just one reason we at Standard & Poor's find Fortune's stock appealing. We also like its attractive valuation, the company's focus on shareholder value, and a solid track record of financial performance. We've assigned the shares our highest investment rating of 5 STARS (strong buy).
Fortune is likely to keep benefiting from healthy consumer spending patterns, with more than 90% of its sales derived from brands with the No. 1 or No. 2 positions in their respective markets. Of Fortune's four operating divisions -- home and hardware, spirits and wine, golf, and office products -- we believe the first two are likely to continue to be standouts in the near and intermediate term.
D.I.Y. PARTNERS. One other inducement for investors: Fortune pays a cash dividend of $1.08 per share, translating to a yield of 2%, which is at the high end of the range among its industry peers.
The home and hardware division (45% of sales and 46% of operating income) is a leader in kitchen and bath products in North America with brands including Moen faucets and Aristokraft, Schrock, and Omega cabinets. In February, 2002, this division was chosen by Home Depot (HD ) to produce the entire line of its Thomasville brand cabinets for all of its U.S. stores. Fortune also produces the Diamond line of cabinets for Lowe's (LOW ).
Recent housing data suggest that consumers are likely to continue spending on their homes. New-home sales increased 7.5% in 2002 and were up 12%, year-over-year, in April, 2003. Existing-home sales increased 5% and 3%, respectively, for the same periods. With kitchens and bathrooms widely considered the most important rooms (in terms of home value) for owners and buyers, we expect Fortune to remain a key beneficiary of the strong housing market. We see both sales and operating profit increasing in mid to high single digits in 2003.
TOP PLAYERS. Regardless of the economic climate, we at S&P believe that consumers usually rely on the quality and performance of leading brands. And Fortune's product lines fit that description. Among its portfolio are brands that hold either the No. 1 or No. 2 positions in their respective categories. In the home category, Moen is No. 1 among faucet makers, while Aristokraft, Schrock, and Omega collectively are No. 2 in cabinets. Masterlock is the leader in padlocks, while Waterloo, which supplies tool-storage products to Sears (S ) Craftsman, is No. 1 in its category.
Brands in Fortune's other operating divisions also sport market-leading positions. In spirits and wine (18% of sales and 36% of operating income), Jim Beam is the top-selling bourbon, while DeKuyper is the leader in cordials. In golf (18% and 17%) Titleist (balls) and Footjoy (shoes and gloves) are each No. 1. Fortune's office-products segment (19% and 9%) also features a number of market-leading brands.
Another thing that makes Fortune appealing to us is its solid history of financial performance, delivering consistent sales and earnings growth, attractive return on equity, and strong cash flow. Over the past six years, comparable sales and operating earnings have increased on average 3.5% and 6%, respectively.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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