This Insider Sees Fortune Brands Going Even Higher

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Since Fortune Brands Home & Security (NYSE: FBHS), a provider of home furnishings and security products, became an independent publicly traded company in September 2011, the stock price has risen 126%, more or less consistently. Now, economic theory tells us that it is rational for company insiders to diversify their wealth away from the same company that is responsible for much of their income. The primary exception would be if an insider was so confident that the stock would go higher (that, in Fortune Brands’ case, a 126% increase in a little over a year was not enough) that the expected gains from buying would offset the increased risk. Studies show that stocks bought by insiders tend to beat the market on average. And buying the stock at its current price is just what Board member David Mackay did on Dec. 7, purchasing 5,000 shares at an average price of $28.87 per share. This gives him a total of about 44,000 shared owned directly. Mackay’s spouse also bought 5,000 shares.

Revenue was up 7% in the third quarter of 2012 from its levels in Q3 2011. Even with cost increases, operating income nearly tripled and net income came in at about $40 million compared to $3 million a year earlier. That meant 24 cents of earnings per share for the quarter, which was a higher level than in the first half of the year and gave Fortune Brands Home & Security a total EPS of 61 cents year to date. That’s 81 cents when annualized, which would still give a high P/E multiple of 36. We suppose that the company’s performance has improved even in the last nine months, but annualizing only last quarter would yield a P/E of 31. Fortune Brands would have to continue growing strongly in order to justify its current valuation, then; this is possible, considering the potential for stronger housing numbers, but perhaps not something we’d want to depend on.

Billionaire Ken Griffin’s Citadel Investment Group liked Fortune Brands Home & Security during the third quarter of the year, increasing its holdings by 19% to a total of 3.1 million shares (check out Griffin's top stock picks). York Capital Management, which is managed by fellow billionaire James Dinan, cut its stake but still reported owning 1.7 million shares at the end of September (find Dinan's favorite stocks).

Other home furnishings and fixtures companies include Masco Corporation (NYSE: MAS), American Woodmark (NASDAQ: AMWD), Leggett & Platt (NYSE: LEG), and Ethan Allen Interiors (NYSE: ETH). Masco and American Woodmark also trade at fairly high multiples: Masco, the largest of these five companies by market cap at $5.8 billion, trades at 29 times forward earnings estimates while American Woodmark, which is actually unprofitable on a trailing basis, is valued at 25 times consensus earnings for the fiscal year ending in April 2014. These stocks are also up at least 80% in the last year, but between the losses at American Woodmark and the fact that Masco’s earnings actually came in lower last quarter than a year earlier we think that we’d avoid both.

Leggett & Platt and Ethan Allen at least have forward earnings multiples in the 15-16 range, and reported earnings growth close to 50% in their most recent quarter compared to the same period in the previous year. We would note that Ethan Allen has considerable short interest, and would tread carefully given that so many market players think that it’s actually overvalued. However, its multiples look good and we’d be more interested in investigating it than the three companies we’d discussed earlier. Leggett & Platt deserves mention for a good dividend yield as well as its growth, though its valuation does seem to already account for strong earnings next year as the trailing P/E is just above 20.

We think taking profits is likely a good move on Fortune Brands. Moving into the stock doesn’t seem particularly attractive as its current valuation depends on continuing its strong growth as earnings increase further, and some peers appear to be considerably cheaper. Bullishness on housing might be better placed in homebuilders or even large banks.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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