You Know Master Lock, Moen and Therma-Tru. Now Meet the Stock FBHS

Fortune Brands Home & Security makes widely used household products yet few people are familiar with its shares. FBHS was spun off from former parent company Fortune Brands on Oct. 3, 2011. It now consists of the three major divisions shown below. Well-known consumer brands in these categories include Moen Faucets, Master Lock, Master Brand Cabinets, Simonton Windows and Therma-Tru Door Systems. The firm has been highly successful on its own. EPS surged by over 619% since 2012. Cash flow per share more than quintupled. Revenues nearly tripled. Over the decade management also retired about 21% of the float through share repurchases. Continuous shareholders did well, but a recent pullback from $108.40 last January to south of $59 last week left FBHS selling for much below its true value. That un-reflected value proposition is unlikely to persist for long. I expect a major catch-up move higher to arbitrage away the disparity. This year is not the first time FBHS has fallen sharply, leading to even more dramatic rebounds. A 52% intra-year decline in 2018 culminated on Christmas Eve that year. By February of 2020, just ahead of the Covid-crisis, the stock had more than doubled without even figuring in dividend income. At its March 2020 panic-low FBHS was momentarily available near $34, down almost 54% in around 48-days. Buyers who flaunted extreme pessimism and held for 13 months had the chance to lock in 318% gains plus dividends. FBHS peaked $114 at that time. It still fetched north of $108 as recently as January this year. Last week's brutal market plunge, though, took it down to as low as $57.42. Once again, intrepid investors got the chance to buy this fine company at one of its cheapest valuations ever. The Law of Asymmetric Returns is always in effect. The three declines took the shares down by an average of (51.8%). The two prior rebounds added back an average of 213% over 13.5-month average holding periods. There's no reason to believe we won't see similarly stellar future returns this time around. Note, too, that every major business metric is now much more favorable than what was in effect back in 2018. FBHS topped out at $73.60 that year on final EPS of just $3.35 and an annual dividend rate of $0.82. As of Tuesday, FBHS was offered for just $58.26, much less than people paid for far less true worth almost four and a half years earlier. Every single year since 2012 has set new all-time EPS records and seen a dividend increase. Simply put, buyers are getting much more value for much less money. Who doesn't think that's a good thing? Last April, management announced plans to split the firm into two separate entities to allow for pure plays rather than remaining a conglomerate. The split is expected to take effect by late this year or early in 2023. More often than not, the parts end up equaling more than the whole. I see the coming corporate action as a positive. What is FBHS really worth? Since 2013, FBHS' average multiple ran about 19.9-times, accompanied by around 1.28% in current yield. As of Friday, those figures were 9.1-times forward EPS along with a historically generous 1.92% yield. Simply reverting back to a more typical valuation could easily send the shares to above $120 based on FBHS' 2022 EPS estimate. Reverse engineering the current dividend rate to normal produces a present day fair value estimate of $87.50. Hitting either of those goals would make for nice gains. The stock peaked between $92.60 and $114 during each of the three years from 2020 through 2022 year-to-date and fundamentals have never been better. Independent research house Morningstar labels FBHS among its highest-rated stocks. It calls present-day as $99, about 70% above today's quote. Yahoo Finance is in full agreement. It calls Fortune Brands H & S undervalued. Its year-ahead target price for FBHS is nearly $100 and might prove too conservative. That is because it only implies a 14.1-times on what would then be its 2023 EPS estimate. Quantitatively oriented FastGraphs is the most bullish of the sources I consulted. It calls FBHS' typical price-to-earnings as 23.5-times, a bit higher than my take on that stock's history. At 22.63-times forward earnings FastGraphs calls for a Dec. 31, 2022 price of $147.08 and a year-end target for FBHS in 2023 of $161.61. Regardless of which source you feel will be most accurate, there appears to be plenty of upside and almost no significant downside from an already beaten down quote. Value Line's longer-term view for FBHS is equally upbeat. The shares fetched $70.79 when the following prediction was made out to 2025 - 2027. By definition, FBHS now offers much greater potential total returns from a lower entry point. Option-minded traders might wish to short naked puts out to Dec. 16, 2022 using strike prices ranging from a very conservative, near the money $60 to more aggressive in-the-money $65 or $70 strikes. Actual pricing on those, with FHBH at $58.26 on Friday are shown below. Worst-case, forced purchases would come at prices running between $53.60 and $56.50. Even the deep in the money $70 strike produced a break-even price which is lower than FBHS has changed hands for in more than two full years. Fortune Brands came down hard over the past few months, simply due to overall market action. There was no company specific bad news. Buying now, after that large selloff, means the shares are suitable for both traders and investors. Buy some FBHS shares, sell some naked puts or consider doing both.

You Know Master Lock, Moen and Therma-Tru. Now Meet the Stock FBHS

Here's why Fortune Brands Home & Security could pay off big.

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