We Think Fortune Brands Innovations Can Deliver Above-Market Growth

Sector Director

Brian Bernard

Since spinning off from its holding company Fortune Brands in 2011, Fortune Brands Innovations has achieved solid top-line growth and improved profitability. Its improved financial performance has been the result of a successful operating strategy overlaying a backdrop of strengthening new home construction and repair and remodel, or R&R, spending. 

Residential construction was a bright spot during pandemic-affected 2020-21, and housing starts remained elevated at about 1.55 million units in 2022. However, deteriorating affordability slowed housing demand, and starts decreased 9% in 2023 to about 1.4 million units. Even so, we expect improving affordability (due to both lower mortgage rates and moderating home price appreciation) will cause new residential construction to begin to rebound in earnest by 2025. We project starts will reach over 1.5 million units by 2026, a level of production we think will persist over the next 10 years. 

R&R spending surged during the pandemic, but project spending softened in 2023. Historically, project incidence has been relatively stable, but average project expenditure is more sensitive to macroeconomic conditions. We estimate owner-occupied improvement spending decreased about 4.5% in 2023 amid a weakening housing market and a challenging prior-year comparison. Nevertheless, with think R&R spending will rebound at a low-single-digit percentage in 2024, and we continue to see at least a 5% long-term growth trajectory for R&R spending.

Fortune Brands made meaningful changes to its product portfolio in 2022-23 with the spinoff of its $3 billion cabinets business (MasterBrand) in December 2022 and the acquisition of several security-related brands from wide-moat-rated Assa Abloy in June 2023. We believe these transactions will bolster Fortune Brands' profit margins.

Business Strategy & Outlook

We assign Fortune Brands a narrow moat rating, supported by brand-intangible assets. In our view, the Moen brand underpins a wide-moat rating for the water innovations segment, which accounts for approximately two-thirds of consolidated profits. However, two factors keep us from awarding Fortune Brands a wide economic moat rating. First, we believe the product portfolio within outdoors & security (roughly 35% of consolidated profits) dilutes Fortune Brands’ aggregate moat due to its lack of product differentiation and pricing power. Second, Fortune Brands’ acquisitive growth strategy has weighed on ROICs. Since its inception as a public company in 2011, the firm has completed 12 acquisitions and has diversified into a new product category (composite decking). In our view, management has allocated significant capital to no-moat businesses. For example, the firm spent over $1.1 billion in aggregate to acquire Fiberon (composite decking) and Larson (screen doors and windows). We believe that acquisitions will continue to play a prominent role in Fortune Brands’ capital allocation policy. 

Fortune Brands’ Moen brand has leading market share in plumbing fixtures, such as kitchen and bath faucets, and serves various end users including do-it-yourself homeowners, professional remodelers, and homebuilders via retail, wholesale, and industrial distributor sales channels. The plumbing fixture market is largely dominated by three brands – Moen, Delta (Masco), and Kohler (private company) – all of which have greater market share than competing domestic brands, imports, and private label products in North America. Relative to competitors, Moen generally manufactures mid- to high-end faucets and shower heads with higher selling prices than lower-tier brands. Moen’s prices are comparable to Delta (Masco), another seller of mid- to high-end products, but are below those of luxury suppliers Kohler and Grohe. Various other brands also compete with Moen such as American Standard (owned by Lixil), Pfister (owned by Spectrum Brands), and private labels such as Glacier Bay (Home Depot) and Tuscany (Menards).

When purchasing faucets and shower heads for residential use, we believe meaningful consideration is placed upon product quality, functionality, and aesthetics. Moen has solidified its reputation over several decades with respect to each category, leading to widespread adoption of the brand among consumers, general contractors, and homebuilders. We believe Moen’s strong brand equity has translated into durable pricing power, supporting favorable segment price/cost and upward-trending segment operating margin.

Moen is the exclusive brand for more than half of the top 50 homebuilders with similar share with the next 51-200 builders. Because faucets and showers represent a negligible percentage of total home construction cost yet are very visible to customers, homebuilders are willing to pay up for superior brands. Put another way, we believe installing Moen products is a relatively inexpensive way to improve the overall perception of a quality home. Although cheaper options exist, the potential savings is not nearly enough for homebuilders to risk impairing their reputation and incurring replacement costs on low-quality, malfunctioning hardware.

During 2016 and 2017, Fortune Brands expanded its water innovations product lines via the acquisition of various luxury brands. Fortune Brands acquired the Rohl (faucets), Perrin & Rowe (faucets), Riobel (faucets), Shaws (kitchen and bathroom sinks), and Victoria + Albert (freestanding bathtubs and kitchen sinks) brands for an aggregate purchase price of nearly $385 million. The acquired brands are now marketed under Fortune Brands’ “House of Rohl” luxury offerings. While Fortune Brands’ acquisitions have provided some diversity amongst the water innovations segment, we estimate that the Moen brand continues to comprise at least 80% of segment sales.

Fortune Brands’ outdoors and security segment manufactures and sells entry and storm doors, combination locks and padlocks, composite decking, decorative trims, and millwork. Notable brands include Master Lock, Therma-Tru (doors) and Fiberon (composite decking). The company has divested assets and actively pursued M&A to refine its product offerings within the segment over the last decade, which has increased segment profitability but also invested capital. In aggregate, we believe the outdoors & security segment warrants a no-moat rating. In our view, the segment’s portfolio carries less brand equity and more fungible products compared with the water innovations segment. Segment ROIC has been volatile and have struggled to consistently exceed the firm’s WACC.

Narrow

Economic Moat

Fortune Brands Innovations Inc

Fortune Brands Innovations, Inc. manufactures and supplies home and security products and services. The company operates through the following segments: Cabinets, Plumbing, Outdoors & Security. The Cabinets segment manufactures custom, semi-custom, and stock cabinetry, as well as vanities, for the kitchen and bath. The Plumbing segment includes faucets, accessories, and kitchen sinks. The Outdoors & Security segment consists of fiberglass and steel entry door systems. The Security segment offers locks, safety and security devices, and electronic security products manufactured, sourced, and distributed under the Master Lock brand. Its brands include Master Lock security products, Masterbrand cabinets, Moen faucets, Simonton windows, and Therma-Tru entry door systems. The company was founded on June 9, 1988, and is headquartered in Deerfield, IL.

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Fortune Brands Innovations, Inc. is an innovation and channel leader focused on supercharged categories in the home products, security, and commercial building markets. Its brands include Moen, House of Rohl, Aqualisa, Emtek, Therma-Tru, Larson, Fiberon, Master Lock, SentrySafe, Yale and August. The company was founded on June 9, 1988 and is headquartered in Deerfield, IL.

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