Will Investors Smile on Fortune?
Are investors finally ready to tee up Fortune Brands Inc.?
Shares of the diversified company, whose products range from whiskey to golf balls, have been largely shunned by investors for years--even though many of its brands are tops in their industries and it has consistently posted higher profit.
Fortune’s stable of familiar brands includes Moen faucets and other plumbing fixtures, distilled spirits such as Jim Beam and Knob Creek bourbons, Titleist golf balls and clubs, FootJoy golf shoes and other household and office products such as Aristokraft and Schrock cabinets, Master Lock padlocks and Swingline staplers. Together they generated $5.5 billion in sales last year.
Titleist continues to dominate the golf-ball industry despite fierce competition, and Master Lock, FootJoy and the cabinet divisions are enjoying strong sales gains. Overall, the company’s per-share earnings (excluding one-time items) jumped 31% in its first quarter, 12% in its second and “we will be up double digits in the second half” of 2000 as well, said Fortune Brands’ chief financial officer, Craig Omtvedt.
Until now, Wall Street has ignored this stock on grounds that it’s an “old-economy” player with limited growth prospects, its strategic direction is vague, rising interest rates will hurt its household-goods lines or that it’s keeping its diverse product groups when corporate streamlining and focusing on core strengths are the rage.
Thus, over the last five years Fortune Brands’ stock price has fallen 16%, while the bellwether Standard & Poor’s 500 index more than doubled in value.
But investors are starting to see renewed promise in the company’s well-known brand names, and expectations are rising that the products will spark stronger earnings growth for the Lincolnshire, Ill.-based concern.
Since July 20, when Fortune Brands posted second-quarter profit that slightly exceeded analysts’ expectations, its stock has jumped 20%. Its shares gained 31 cents Wednesday to close at $25.63 in composite trading on the New York Stock Exchange.
Some analysts also have noted recently that the value of Fortune Brands’ divisions tops $50 or more a share, meaning the stock right now is a bargain. James Goll, an analyst at PaineWebber Inc., said Fortune Brands in part “is getting painted with an interest rate brush due to its home products segment,” meaning investors fret that sales of its plumbing fixtures and other items will suffer as home sales decline. But that segment continues to flourish despite the rate hikes that have already occurred, he said.
Also, “this is the first time that an interest rate hike has occurred in the company’s current form,” he said. Indeed, the company was created in 1997 when its predecessor, American Brands, shed its American Tobacco business and the remaining lines were renamed Fortune Brands.
Despite its valuable brands, some investors and analysts still aren’t convinced that Fortune Brands’ stock is ready to take off, and they’re waiting to see if the company breaks itself up, at least partially, to help boost its stock price.
Late last year, Fortune Brands’ management--led by Chief Executive Norman Wesley--said it was examining its portfolio of brands to see how it might raise the company’s share value. But the outcome of that review probably won’t be announced until next year, and that’s not sitting well with some Wall Streeters.
“We, along with a lot of investors, are impatient when it comes to determining [Fortune Brands’] strategic direction,” analyst Justin Maurer of Merrill Lynch & Co. said in a recent report.
Yet Maurer upgraded his rating on the stock to a “buy,” contending that even if Wesley and his team propose “an uneventful” strategic move, the stock is still worth owning because it has fallen so steeply in price. Indeed, Fortune Brands sells for a meager 11 times its expected per-share profit for 2000.
Fortune Brands’ Omtvedt conceded: “I’m sure there are people out there who are anxious to see the results of our portfolio review,” but he said “we’re not putting a timetable” on when it will be done. Also, he cautioned that “it’s not a remedial review” of Fortune Brands’ product lines “because the company is not broken.”
The review is to ensure that Fortune Brands has the right products “for the long haul,” he said.
Also, “one thing we’ve noted is that since mid-1999, there truly has been a downdraft in [stocks of] consumer products companies and old-economy stocks,” he said, “and we’ve been part of that downdraft.”
Fortune Brands already has taken several restructuring steps to cut costs, boost efficiency, better promote its brands and bolster its stock price. Among other things, it moved its headquarters to Illinois from Old Greenwich, Conn., to save money and be closer to its operating divisions. The company has moved a sizable portion of its manufacturing production to Nogales, Mexico, where it built its own 40-acre industrial park.
It’s also bought back nearly 18 million shares, or 10% of its common stock outstanding, since early 1999 in a bid to support its share price. And PaineWebber’s Goll, who also has a “buy” rating on the stock, said Fortune Brands’ diversity should not be seen as a liability.
“Just like an investor wants to diversify their portfolio, Fortune Brands’ diversity of brands allows it to deliver more consistent earnings than its peers,” he said. But Goll acknowledged that as “people have rotated into technology and telecommunications stocks, Fortune Brands has been a little bit forgotten, and the fact that it has four different businesses has been more of a negative than a positive in investors’ minds.”
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Improved Fortunes
After largely being shunned by investors, Fortune Brands’ stock is moving up as the company’s diverse family of brands, including Titleist golf balls and equipment. Jim Beam whiskey, Swingline staplers and Master Locks, keeps posting stronger year-over-year earnings growth.
