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Home and security products company Fortune Brands (NYSE:FBIN) missed analysts' expectations in Q2 CY2024, with revenue up 6.6% year on year to $1.24 billion. It made a GAAP profit of $1.06 per share, improving from its profit of $0.80 per share in the same quarter last year.
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Fortune Brands (FBIN) Q2 CY2024 Highlights:
- Revenue: $1.24 billion vs analyst estimates of $1.28 billion (3.1% miss)
- Operating profit: $199.1 million vs analyst estimates of $215.4 million (7.6% miss)
- EPS: $1.06 vs analyst expectations of $1.12 (5.3% miss)
- The company lowered full year revenue guidance but maintained full year EPS guidance
- Gross Margin (GAAP): 43.6%, up from 40.2% in the same quarter last year
- Free Cash Flow of $222.7 million is up from -$135.9 million in the previous quarter
- Organic Revenue fell 3% year on year (-6.3% in the same quarter last year)
- Market Capitalization: $8.64 billion
Targeting a wide customer base of residential and commercial customers, Fortune Brands (NYSE:FBIN) makes plumbing, security, and outdoor living products.
Home Construction MaterialsTraditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Fortune Brands's demand was weak over the last five years as its sales fell by 3.3% annually, a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Fortune Brands's recent history shows its demand has stayed suppressed as its revenue has declined by 7.7% annually over the last two years.
We can dig further into the company's sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Fortune Brands's organic revenue averaged 4.4% year-on-year declines. Because this number is better than its normal revenue growth, we can see that some mixture of divestitures and foreign exchange rates dampened its headline performance.
This quarter, Fortune Brands's revenue grew 6.6% year on year to $1.24 billion, missing Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 3.3% over the next 12 months, a deceleration from this quarter.
Operating Margin
Fortune Brands has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.2%. This result isn't surprising as its high gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Fortune Brands's annual operating margin rose by 2.3 percentage points over the last five years, showing its efficiency has improved.
This quarter, Fortune Brands generated an operating profit margin of 16.1%, up 2.9 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
EPSAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Fortune Brands's EPS grew at an unimpressive 4.3% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 3.3% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.
We can take a deeper look into Fortune Brands's earnings to better understand the drivers of its performance. As we mentioned earlier, Fortune Brands's operating margin expanded by 2.3 percentage points over the last five years. On top of that, its share count shrank by 11%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Fortune Brands, its two-year annual EPS declines of 20.1% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q2, Fortune Brands reported EPS at $1.06, up from $0.80 in the same quarter last year. Despite growing year on year, this print missed analysts' estimates. Over the next 12 months, Wall Street expects Fortune Brands to grow its earnings. Analysts are projecting its EPS of $3.53 in the last year to climb by 27.3% to $4.49.
Key Takeaways from Fortune Brands's Q2 Results Revenue, operating income, and EPS all missed. Revenue guidance for the full year was lowered but full year EPS guidance was maintained, the midpoint of which is above expectations. With the miss though, there will be questions as to whether the company can make up for it in the second half of the year and still hit its guidance. Overall, this was a mediocre quarter for Fortune Brands. The stock remained flat at $72.17 immediately after reporting.
