We have maintained our long-term ‘Neutral’ recommendation on Fortune Brands Inc. (FO) with a target price of $63.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term ‘Hold’ rating on the stock.
Fortune Brands is a leading diversified consumer products company that caters to a wide array of products ranging from home and hardware to premium spirits and golf equipment. The Illinois-based company manufactures and sources its products largely from Canada, Mexico, Europe, China, Thailand and the U.S. Fortune Brands offers its products mainly in the U.S., Canada, Europe (primarily the U.K, Spain, Germany, and France), Australia, and Mexico. The company possesses a portfolio of well-established brands, such as Moen, Master Lock, Therma-Tru and Simonton in home and security products; Jim Beam, Sauza and Maker’s Mark in spirits; and Titleist and FootJoy in golf products. The strong portfolio offers a unique competitive edge to the company.
Moreover, in March 2011, Beam Global Spirits & Wine, a unit of Fortune Brands adds one more drink to its portfolio of spirits by acquiring the brand Skinnygirl on undisclosed terms. Skinnygirl is already a well-known brand in the U.S., popular among women seeking low-calorie drinks. Beam Global’s acquisition of this premium brand would help leverage the company’s strong distribution and sales network, thereby adding more consumers and growing this high-quality brand from coast to coast. The company intends to include a few more drinks under the Skinnygirl brand, which would facilitate in building a strong platform to drive future growth.
Furthermore, Fortune has planned to split its three operational segments into separate entities by the first half of fiscal 2011. The company is looking for a tax-free spin-off to shareholders of its Home and Hardware business while exploring the sale or tax-free spin-off of its Golf business. This will help the company to maximize the long-term value for its shareholders by separately focusing on each business.
Additionally, Fortune Brands has taken initiatives to boost cash flow through prudent working capital management and divestment of non-core product lines. Consequently, the recent divestment of local brands in Germany and Cockburn’s Port brand provides the company greater flexibility to pursue opportunities in its core businesses. Apart from this, in a move to enhance its brand portfolio, the company has fully acquired the El Tesoro tequila brand and also secured the distribution rights of Thatcher’s Organic Liqueurs.
Above all, management has reduced leverage by deploying operating cash to pay down debt. Long-term debt at the end of fiscal 2010 decreased $775.9 million to $3,637.4 million from $4,413.3 million in the year-ago period. Accordingly, the company’s long-term debt-to-capitalization ratio reduced to 39.1% in fiscal 2010 from 46.4% in the prior fiscal.
However, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., Europe and many emerging markets may lead to increasing risk of a potential excise tax on spirits by governments of countries. The effect of any excise tax increase in future may have an adverse effect on Fortune’s financial performance.
Besides, the company faces intense competition from well-established players in the market such as Diageo plc (DEO) and Brown-Forman Corporation (BF.B) in its spirits business and Masco Corporation (MAS) in its home and hardware business. Fortune Brands also encounters competition from Nike Inc. (NKE) in the golf business.Further, global competitive conditions have also intensified. Consequently, risk associated with operating in such a competitive environment may undermine the company’s future operating performance.
BROWN FORMAN B (BF.B): Free Stock Analysis Report
DIAGEO PLC-ADR (DEO): Free Stock Analysis Report
FORTUNE BRANDS (FO): Free Stock Analysis Report
MASCO (MAS): Free Stock Analysis Report
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