Home and hardware goods, golf and recreational equipment and alcoholic spirits would seem to be an eclectic mix of businesses with little or no synergy between business components. Fortune Brands Incorporated (FO) is a holding company wearing all three of these hats, making it difficult to pigeon hole the company as a particular industry player.
Each of these business lines is impacted in different ways by the slumping global economy.
Fortune’s spirit lines include premium brands such as Jim Beam, Maker’s Mark, Souza and Courvoisier. While generally an economy in or approaching a recession stimulates alcohol consumption, that most often is reflected in higher sales and consumption of lower end brands, Fortune is actually reporting strong growth in its premium brands. This is in contrast to one of Fortune’s largest competitors, Constellation Brands (STZ), which is reporting slower sales in the higher end of its product lines. (See also: "Keep Your Eyes on the Constellation.")
The company’s home and hardware operations are a different story. This component of Fortune’s holdings includes cabinetry, faucets, locks and safety devices and bath fixtures. Cabinet lines include Aristocrat, Omega and Kitchen Craft, among others. As with others with exposure to the home construction and remodeling businesses, Fortune is experiencing a significant decline in revenues from this group. (For more on FO, click here.)
Golf and recreational products manufactured and distributed by Fortune are feeling the impact of a slowing economy and a gradual reduction in the rounds of golf played in the United States. The golf product line is manufactured under the Acushnet label and includes high end brands such as Titlist, Cobra and Footjoy.
Slower sales in the U.S. are for the more than offset by the growth of the company’s revenues derived from international sales. Fortune is gaining significant new business in the Asian markets, where golf continues to increase in popularity.
Each of these components contributes about one-third of the company’s revenue.
Fortune earlier this year increased its dividend, reflecting the company’s confidence in their ability to weather the current economic storm. The stock has been trading in a descending channel over the last year, reflecting a bearish sentiment by investors which continues today.
The company balance sheet is strong, with a leverage ratio of 2.4, a debt to equity ratio of .62 and a current ratio of 1.5. The company generated a return on equity of 14% and a return on assets of 6%. There is currently about $3.5 billion in long term debt out.
The company’s debt is rated BBB by Standard and Poor’s and Baa2 by Moody’s. Bonds maturing within the next 5 years are actively traded at a significant discount. The December1, 2013 bonds recently traded at a price of 78, producing a yield to maturity of 13.51%. The bond is a buy at this level in my opinion.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com. James F. Dlugosch contributed to this article.
