Fortune Brands: Does Bourbon Mix with Hardware?

Posted by: Charles DuBow on January 30

Fortune Brands could use a shot.

At a time when people buffeted by the economy are most in need of a stiff drink, it would seem logical that liquor companies would be doing well. So how to explain Fortune Brands’ (FO) stock slide?

Most people know the Deerfield, Ill.-based company as as a purveyor of such top-shelf bourbons as Maker’s Mark and Knob Creek, as well as Courvoisier, Canadian Club and Cockburn’s port. What they may not know is that it also a major presence in hardware and golf as well.

Over the past few years, while the housing industry was on fire, shareholders may not have questioned FO's investment in companies like Moen, but now that the sector is in trouble the faucet-maker is dragging the stock price down. Last week the company announced that its fourth-quarter net income declined to $201.5 million, or $1.28 a share, from $257.6 million, or $1.65 a share, a year ago. From a high of $89.30 on Aug. 7, 2007, the share price sank 26% to a low of $65.67 earlier this month (see chart below).

Unsurprisingly, FO's wine & spirits division is chugging along nicely. In Q4 sales rose 10.2%, to $858.8 million, and operating profit edged up 1.3%, to $245.9 million.

On the other hand, the news coming out of its home and hardware group was bleak. The hardware unit is, believe it or not, FO's largest division but it saw sales drop 7.6%, to $1.11 billion, and operating income fall 14.4%, to $138.7 million.

The company's golf segment, which makes Titleist brand golf balls and related products, saw a 12.6% drop in sales, to $245.1 million, but its operating loss dipped to $6.1 million.

As the old song goes, which of these things is not like the other? It's time like these when big conglomerates need to sit back and re-examine their holdings and their strategies. Do the different units of their business make sense together? Does management understand units in completely different industries? Is the best way to unlock shareholder value to spin off those assets that don't fit?

In recent months, the clamor for eBay to hive off Internet phone service Skype has grown louder and hopefully new CEO John Donahoe will be able to make it happen soon. Maybe it's time for Fortune's CEO Bruce Carbonari to sell its hardware group. The problem is that given the housing outlook he probably wouldn't get much of a price. Good thing he can still drown his sorrows in his spirits division.