|Shares Out. (in M):||96||P/E||18.5||16.9|
|Market Cap (in $M):||6,042||P/FCF||0||0|
|Net Debt (in $M):||1,317||EBIT||0||0|
|Borrow Cost:||General Collateral|
Caveat: I wrote this up prior to ALLE’s Q3 earnings, not expecting the market to punish them as much as it has on the headline miss. Nonetheless, I think a12-18 underperform thesis is intact even down here at a ~$63.00 price.
Allegion is a spin-off from Ingersol Rand in late 2013
#2 player in $25-30 billion addressable market for locks and access control
Assa Abloy: $7 billion; Doka+Kaba: ~$2 billion, and ALLE ~$2 billion
Fragmented: top 5 are ~60% market share
Mechanical security (e.g., regular door locks and metal, rectangular “push” bars) comprises ~80% of business mix (vs. 20% electronic / services)
50% U.S. non-resi, 20% U.S. resi, and 30% Int’l non-resi exposure. As shown below, the U.S. segment is over 90% of the EBIT of the company.
Approximately 50% of U.S. business is related to new construction, with the balance replacement/retrofit
Brands include Schlage, Kryptonite, Briton, LCN, Interfex, and Bocom
Lots of SKUs, local safety regulations, relationships with locksmiths, builders – higher moat than you’d think
HIGH LEVEL NUMBERS
ALLE is a likely underperform over the next 12-18 months – with a decent chance to get crushed. Here’s why:
Business Fundamentals Face Huge Non-Resi Headwinds (~50% of revenue and ~66% of EBIT)
ALLE sells mechanical locks (~80% - think very basic Schlage door locks and the push-to-open bars on office doors) and electronic locks and systems/services (~20%)
No matter what stories the Street sells (high-tech security, expanding margins in Int’l segment), this stock is a U.S. non-resi play. ALLE generates approximately 50% of revenue and ~66% of EBIT from U.S. non-residential construction. This is its highest margin (25-30% EBIT+) business as well.
Forward looking, non-residential construction contracts turned meaningfully negative in the middle of 2016
Running these numbers through, I see no reasonable way to hit out-year consensus figures. For illustrative purposes, if non-resi construction declines ~10% in 2017, the company will miss EBIT consensus of $500 mm by ~13% and EPS of ~$3.70 by ~15-20%
Valuation is Stretched and at Historical Highs
While not apparent from ALLE’s historical multiple, given its limited trading history (spun out of Ingersol-Rand in 2013), the “security” space has seen massive multiple expansion
Assa Abloy, the largest competitor in the space (more overweight Europe, 3x the size of ALLE), has been successfully performing a M&A roll-up story, expanding multiples itself, and by extension, the entire space, well beyond historical averages
Assa’s historical multiple prior to 2013 ranged between 10-15x P/E. Currently it’s multiple is well north of 20x, and ALLE is in the high teens
These multiples could easily contract as 1) business fundamentals deteriorate across the space as organic growth normalizes to historical levels or 2) there is any sort of pause or questioning of Assa’s strategy
Buy-out potential – Horizontal guys would face anti-trust concerns. Vertical buyers have less reason now with 1) valuation high and 2) less/no ability to work for tax inversion play
Resi growth story – 20% of revenue and still growing. Probably not enough to cushion a non-resi downturn
Int’l margin story – Typical sell-side fluff while ignoring the (lack of) impact. Even a 500 bps improvement in international margins is approximately a $20 mm impact (on $400 of EBIT)
Roll-up story – ALLE has shown no real desire or ability to do this. I assume the market would be dubious on the prospects
High-tech story – Hard to quantify, but some small % of sales has a tailwind from an integration of networking/locking systems. This has the Street excited, but I don’t think it will hold water in the face of a non-resi downturn.
Mis-reading of non-resi downturn – While it does really appear that non-resi is set to slow over the next 12-18 months, ALLE is overweight institutional non-resi, which is slower growth, but hasn’t been seeing the same amount of decline in contract value
Later cycle – Since locks aren’t really put on until the end of a build, it may take longer to see the weakness in the numbers
ASSAB Historical Multiple – Overweight Europe relative to ALLE
Non-resi slowdown becomes more apparent
|Entry||11/01/2016 05:46 PM|
Thanks for the idea. Couple questions.
1. Where do you get the non resi data?
2. Why do you think that non-resi contracts will continue to trend negative? Couldn't they inflect positive? Can't tell from your graph but how long have they gone negative for?
3. What are the detrimental margins you assume if sales growth goes negative?
|Subject||Make locks great again?|
|Entry||11/09/2016 08:27 AM|
Tough to see a decline in non-resi if Trump is true to his word about ramping up infrastructure spend and that could lead to a much improve performance on Allegion's business compared to your forecast.
|Subject||Re: Re: Make locks great again?|
|Entry||11/09/2016 01:06 PM|
URI is up 16% and Ashtead up 13%. That's Terex's and OSK's customers and they are pricing in massive construction spend. I am very skeptical. The projects are passed by Congress and the republican congress is fiscally conservative. Terex is also up 13%. I think all these (and tons of other construction related names like X (17%!!?!?!?), CMC (17%?!), MTW (16% !!?) and many others are all pricing in way to bullish a scenario for shovel-ready projects that Congress will not approve. I believe disappointment awaits.