Fortune Brands Innovations, Inc.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 3.5/5

A leading home and security products company, specializing in the design, manufacture, and sale of branded products used in residential home repair, remodeling, new construction and security applications.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Fortune Brands Innovations (FBIN) operates through three reportable segments: Water Innovations, Outdoors & Security, and Corporate. Its diverse portfolio includes leading brands, such as Moen, Master Lock, and Therma-Tru.

Business Overview:

  • Water Innovations: This segment offers a wide range of faucets, fixtures, and related plumbing products primarily under the Moen brand. It’s FBIN’s largest segment by revenue.
  • Outdoors & Security: This segment manufactures and markets security and safety solutions, including locks, safety and security devices, and associated accessories under brands like Master Lock. It also has exterior doors under brands like Therma-Tru.
  • Corporate: This segment primarily reflects the Company’s corporate operating costs and associated activities

Competitive Landscape:

  • The company operates in highly competitive consumer and trade brand categories.
  • Its competitors range from branded players with strong recognition and presence to smaller, more niche manufacturers.
  • Competition in the home improvement and security markets is mainly based on brand quality, customer service, product availability, and competitive pricing.
  • There is a significant concentration of sales through large retailers like Home Depot and Lowe’s.
  • While the company competes with other providers in the space, they believe their focus on brands, customer service, a network of distribution centers, product quality and strong operating processes allow them to compete effectively.
  • The company has a global presence with distribution partners in the U.S., Canada, Asia, and Europe

Moat Analysis:

  • Moat Rating: 2.5/5 - Narrow Moat

While FBIN has some competitive advantages, they aren’t strong enough to constitute a wide economic moat. Here’s a detailed breakdown:

  • Brand Recognition: The company boasts several well-known brands like Moen, Master Lock and Therma-Tru, which can provide some pricing power and customer loyalty. However, these brands are not unassailable, as there is a risk of preference drift.
    • While those brand names create an advantage, they are not able to generate returns on invested capital above 20%.
  • Distribution Networks: FBIN has established extensive distribution networks, particularly in North America, that can provide a competitive advantage. This includes the network of stores they have, the ability to quickly get products to stores in a timely manner and their internal truck fleet. However, the network can be replicated by other competitors.
  • Switching Costs: Switching costs for its products, especially in the Water and Security business, are somewhat high because they are often integrated into a new home or a remodel, and switching means removing and replacing. This allows FBIN to retain higher prices than competitors. However, these are not insurmountable barriers.

Moat Risks and Business Resilience:

  • Exposure to Commodity Prices and Energy: FBIN is susceptible to global commodity and energy price volatility, since it uses raw materials that are impacted by economic conditions, weather, and geopolitical events. This can lead to higher input costs and pressure on margins.
  • Impact of Inflation and Rising Interest Rates: They can affect material costs, the rates used for credit facilities, and consumer demand for the company’s products. It can also impact the interest rates for mortgage applications, which can lower the new home construction rates.
  • Reliance on Retailers: A large portion of sales come from big-box retailers which can put pressure on pricing and place the company at risk of losing a large percentage of sales if they stop carrying a specific brand.
  • Cyclicality of Construction: The business is closely tied to new home construction activity. Downturns in housing starts or home remodeling can negatively impact revenue and profits. This is a big risk for the Outdoors and Security segment with the Therma-Tru brand.
  • Rapidly Evolving Technology and Competitive Landscape: The speed of technological change in areas such as smart home products and connected security devices could render some offerings obsolete. As such, increased innovation and competitive product development can erode pricing power.
  • Geopolitical uncertainties: As FBIN operates internationally, changes in trade policies, tariffs, and international relationships could affect its revenue and operations. The dependence on several countries for sourcing materials is also a geopolitical risk.
  • Supply Chain Issues: Any major disruption in supply chains could increase prices and reduce the supply of vital components. This would hurt the company’s ability to operate and manufacture its products.
  • Inability to Sustain Product Innovation: FBIN relies on innovation for growth, and inability to make new products and integrate new technology could hurt their value creation and market position.

Despite these risks, the company’s geographically diverse operations in North America, Europe, and Asia reduce its dependence on a particular market. Moreover, the company’s focus on innovative, branded products offers some resilience against pricing pressures. However, it is important to follow how the situation evolves.

Financial Analysis

  • Revenue:
  • In the thirteen weeks ending September 30, 2023, Net sales were $1,470.2 million, an increase of 1.1% over the same period in 2022. Net sales for the first three quarters of 2023 were $4,237.7 million, which is almost identical to last years revenues
  • Water Innovations is the main revenue contributor of FBIN, accounting for 50.8% of the net sales, while Outdoors & Security comes in second with 37.1%
  • The company did increase prices by about 2% and volume by 1.2%, while the FX exchange rate dragged revenues by 2.1% in Q3
  • Margins:
  • Gross profit for Q3 of 2023 was $594 million (or 40.4%) which decreased in both dollars and percentage from Q3 of 2022 (41.1% margin and $604.3 million) which was largely due to material costs increases.
  • Adjusted operating income was $185.5 million or 12.6% of net sales in Q3 of 2023 which dropped from 13.8% in Q3 of 2022, this was because of lower gross profits and increased operating costs.
  • The management expects the inflation and supply-chain constraints that affected the costs in past to continue in the next few months.
  • Balance Sheet:
    • The company has a good amount of cash - a $554.3 million of cash and cash equivalents as of 09/30/2023.
    • Total debt is around $2,700 million, which is around 3x of the 2022 earnings.
    • They have recently issued and reissued Senior Notes, with varying rates, but the net interest expense for 2023 has been approximately $50 million.

Other things to consider:

  • CEO Transition: In January 2023, Nicholas Fink was appointed as CEO, this might affect the future direction of the company. So far it seems as if his leadership has been stable and the company is continuing its growth trajectory.
  • Focus on Innovation: Management emphasizes innovation and new product development, which is essential to maintain growth in this company.
  • Pricing Power: During the last earnings call, the company showed that they are able to increase prices without greatly affecting sales volume, which demonstrates some pricing power. They are also focused on reducing discounts in order to maximize revenues.
  • Share Buybacks: The company has recently increased the amount allocated towards buying back its own shares, which demonstrates confidence from management.
  • Guidance:
  • The management expects the revenue growth of full year 2023 to be between 1-3% and EPS growth to be between 5.9 to 9.8 per share.
  • Future Outlook: Management seems optimistic for the long-term future, and is focused on reducing inventories, paying debt and expanding production capabilities.

Understandability:

  • Rating: 3 / 5

FBIN’s business is relatively easy to grasp—it sells branded products for the home and security industries. However, the complex accounting statements can be complex, which takes some time to fully understand. The presence of different segments, each having their intricacies, also makes understanding the company harder to some extent.

Balance Sheet Health:

  • Rating: 3.5 / 5

The company has a positive cash balance, but also has significant amounts of long-term debt. Although debt does not look immediately concerning, it does reduce the margin of safety and could cause issues with profitability in periods of economic distress.

Overall, FBIN is a profitable company with strong brand names, a broad distribution network and a good history of strong returns on capital. However, it also faces competitive pressure, commodity volatility and operational challenges. While its moat isn’t extremely wide, it is reasonable enough for a longer holding period. This requires an understanding of FBINs underlying drivers of value, which makes valuation paramount.