3 Reasons to Sell FBIN and 1 Stock to Buy Instead

Fortune Brands has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6.2%. The stock now trades at $61.55, marking a 16.2% gain. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Fortune Brands, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Fortune Brands Will Underperform?

We’re happy investors have made money, but we're swiping left on Fortune Brands for now. Here are three reasons we avoid FBIN and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

Investors interested in Home Construction Materials companies should track organic revenue in addition to reported revenue. This metric gives visibility into Fortune Brands’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Fortune Brands’s organic revenue averaged 3.6% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Fortune Brands might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Shrinking Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Looking at the trend in its profitability, Fortune Brands’s operating margin decreased by 10.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 12.8%.

3. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Fortune Brands, its EPS declined by 5.3% annually over the last five years while its revenue grew by 5.1%. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Fortune Brands, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 15.4× forward P/E (or $61.55 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.

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