Fortune Brands Innovations

Fortune Brands headline second-quarter results were affected by net tariff refund benefit. Sales declined by 4.1% year over year and adjusted EPS came in at $1.35 per share, which included net tariff refund benefit of $0.52 per share.

Why it matters: Repair and remodeling spending continues to remain weak as both water and outdoor sales saw mid-single-digit declines. In the water segment, pricing increase of low single digits was more than offset by volume declining by high single digits, resulting in sales decline of 5.4% excluding China. Operating margin was reported at 20.4%, up about 390 basis points. Tariff refunds benefited operating margin by about 10 percentage points. Profitability remains weak after excluding the impact of nonrecurring tariff refunds.

The bottom line: We maintain our fair value estimate for Fortune Brands at $55 per share and view the recent rally as confidence in new leadership changes. Management revised its full-year 2026 EPS guidance upward to a range of $3.22-$3.52, which includes a net tariff benefit of $0.52 per share. Excluding the tariff benefit impact, the EPS guidance for the year was revised down by $0.30 per share at the midpoint.

Long view: We like Jesse Singh taking the helm as the new CEO of Fortune Brands. We think his prior experience in selling homebuilding products, including his time at AZEK, translates well to Fortune Brands. He is especially well-suited to lead the company given the current challenges. With new leadership in place, management's focus shifts to long-term priorities for the business, which includes taking steps to address the recent underperformance and market share loss. We continue to believe in the turnaround story given the underlying strength of company's brands, especially in the water segment. Smart water products under the Flo brand and connected locks business are major growth opportunities.

Management has recently announced the strategic review of the underperforming Fiberon business to sharpen its focus on core brands. Fiberon is an example of the inherent risk of value destruction in a strategy focused on acquisitions. We were pleased to hear management's comments regarding prioritization of organic investment over M&A.

Fortune Brands has a fair value estimate of $55 per share. Our fair value estimate equates to 18 times adjusted 2026 EPS estimate and implies an 11 times forward EV/Adj. EBITDA multiple. Given that 2026 earnings are expected to be cyclically depressed, and we expect recovery to start in 2027, using the 2028 earnings estimate gives a better sense of the firm’s valuation. Our fair value estimate is approximately 13 times the estimated 2028 EPS ($4.2 per share). Our weighted average cost of capital for the firm is 8.5% based on a cost of equity of 10.3%, a 24.0% long-term tax rate, and a 70% equity weighting.

Fortune Brands continues to be a cyclical homebuilding products company with significant operating leverage driving short-term volatility in its fundamentals. The US housing market continues to be slow, which drives R&R spending, and new home construction continues to be sluggish. As a result, revenue has been declining from $4.7 billion in 2022 to $4.5 billion in 2025, a cumulative decline of 4.2% despite sizable acquisitions.

Over the longer run, we see the R&R market growing at a mid-single-digit percentage and annual housing starts exceeding 1.5 million units by later this decade. Once the US housing market normalizes by 2028, we forecast Fortune Brands will deliver 3%-4% average annual organic sales growth on a mid-cycle basis, with another point of growth from acquisitions. We model future acquisitions happening at an enterprise value to sales multiple of 2 times. Our long-term projections for the firm are on the conservative side due to execution challenges, and we largely model the firm’s revenue to grow in line with the growth in its end markets.

In terms of margins, we expect margins to be pressured in the near-term due to cyclical weakness, but start recovering from 2027 onwards. We forecast that the water segment adjusted operating margins can be as low as 20% in severe downcycles and can reach 25% in upcycles due to the inherent operating leverage in the business model. On a mid-cycle basis, we project 22.5% adjusted operating margins for the water segment, which is in line with historical trends. We project mid-teens adjusted operating margins on a mid-cycle basis for both the outdoor and security segments. On a consolidated basis, this leads to mid-cycle operating margins of around 16.3% for the firm. We note that our margin assumptions are significantly lower than the firm’s long-term margin guidance of 20%-22% in its 2022 investor day. We think there is a path for the firm to raise its margin profile, but we would like to see a lot more evidence on execution and disciplined capital allocation before we raise our margin projections.

We model average Capital expenditures intensity to be about 2.8% of sales on a mid-cycle basis. We think that the firm would be able to improve its working capital cycle over time from the currently elevated levels, which will further support cash flow conversion. Our projections lead to more than $500 million in free cash flow generation from 2028 onwards. We expect adjusted EBITDA to grow at about 4.0% CAGR over the next decade from the relatively depressed base in 2025.

The second stage of our valuation model assumes that Fortune Brands can generate an average of 20% RONIC and 4% earnings growth for 5 years after our ten-year explicit forecast period. The second- and third-stage assumptions within our DCF model imply a terminal EV/EBITDA multiple of about 9 times.

We assign Fortune Brands a Morningstar Economic Moat Rating of Narrow, supported by brand intangible assets. The firm owns leading brands across categories, including faucets, kitchen and bath fixtures, entry and storm doors, composite decking, fire safes, and security systems. While the company has a leading market share across many product categories, we base our moat on segments such as water and security, where leading share and brand power translate into pricing power. In our view, the Moen brand, along with House of Rohl, underpins the moat for the water innovations segment, which accounts for approximately two-thirds of consolidated profits.

Fortune Brands frames its business around two end markets: repair and remodel, and new home builds. Around two-thirds of consolidated revenue comes from R&R, and the remaining one-third comes from new home builds. R&R spending has historically been more stable and consistent than new home builds because of the inevitable need to fix broken faucets, doors, and decking.

Water Innovations Segment: The water segment holds a leading market share in plumbing fixtures and kitchen and bath faucets, consistently ranking among the top plumbing brands in North America. Top brands include Moen and the House of Rohl (an umbrella brand for luxury brands), both favored by homeowners, professional remodelers, and homebuilders. The plumbing fixture market is largely dominated by three brands: Moen, Delta (owned by Masco), and Kohler (privately owned). These three brands account for around 40% of the market, while the remaining 60% is highly fragmented among numerous smaller players. Fortune Brand’s Moen consistently ranks among the top three in sales due to its high product quality, functionality, and aesthetics.

Faucets and showers represent a negligible percentage of total home construction cost yet are very visible to customers, therefore homebuilders are willing to pay up for superior brands. In other words, we believe installing Moen products is a relatively inexpensive way to improve the overall perception of a quality home. As a result, many homebuilders maintain multi-year supplier relationships with Moen, leading to repeat business and strong margins.

With industry-leading premium brands, the water innovations segment consistently maintains adjusted operating margins well above 20%. The margins of Fortune Brands' water segment are especially strong given the characteristics of its industry. Even in weak R&R markets where Water segment sales decline, operating margins have remained relatively steady, suggesting resilient pricing power. Additionally, when we compare water segment sales (adjusting for supply chain disruptions and international sales) with indicators of overall R&R activity in the US, the segment has performed well. This points to the strength of the Moen brand and its ability to retain market share throughout the cycle.

Moen brand offers strong reliability and ease of installation, making it a top choice among plumbers and remodelers. Professional contractors have decades of experience with certain brands and generally don’t prefer switching to a new brand. As most Water Innovation sales come from repair and remodeling, we believe reliability and quality are important considerations for both retail do-it-yourself and professionals. According to numerous independent online plumber reviews, Moen scored top marks for its sturdy design, leak-free construction, and ease of repair.

We believe that an industry-leading market share backed by reputable independent reviews, brand awareness, and high penetration among professional consumers suggests that the water segment has a strong competitive advantage. Moen continues to be favored among the mass market, and the House of Rohl is still considered an umbrella of luxury brands with its unique handcrafted designs. The strength of brand intangible for the water segment is evident from the fact that the top brands in this space have not changed much in the past several decades. We expect the water segment to be the primary driver of Fortune Brands' moat as its products have a strong track record of reliability, enjoy high market share and brand favorability, which ultimately translates into pricing power.

Security Segment: The security segment includes the ubiquitous Master Lock brand and other brands like American Lock. The Master Lock brand primarily sells into retail channels, dominating the North American market for traditional padlocks, mechanical locks, and combination locks. As per our research, Master Lock products were priced at a premium relative to similar products on e-commerce platforms, providing evidence of their pricing power. Even if prices were similar, having a brand-based intangible asset can lead to better sales, all other factors being equal.

Branding matters in product categories related to locks, mostly to give customers peace of mind. When purchasing a lock, customers have shown a preference for a proven option to make sure their house or belongings are protected. For this reason, we find that Master Lock is the most prominent padlock with maintainable pricing power due to its reputation for strong durability.

Outdoor Segment: In our opinion, this is a no-moat business. We consider these product categories to be commodities as they compete primarily on price. Fortune Brands’ outdoors segment manufactures and sells entry and storm doors, railings, composite decking, decorative trims, and millwork. Notable brands include Therma-Tru (entry doors), Larson (storm doors), and Fiberon (composite decking). The segment’s portfolio carries less brand equity and more fungible products compared with the water innovations segment. Essentially, the product categories in this segment are defined by functional specifications rather than brand preference.

The R&R market is poised for long-term growth, driven by several secular tailwinds, including the aging housing stock and favorable demographics.

Connected products could be a multi-billion-dollar opportunity for Fortune Brands. Moen’s smart water product portfolio is well-positioned in the market, and the firm’s smart security product offerings are improving.

Fortune Brands has a robust acquisition strategy, and future acquisitions could help the company achieve stronger sales growth and create value for shareholders.

R&R spending and new home construction could materially weaken due to challenging housing affordability, high interest rates, and economic uncertainty. Also, large acquisition deals could destroy shareholder value.

It can be argued that some of the products in the firm's security and outdoor segments are commodities with no pricing power. This can make it difficult for the firm to earn consistent economic profits.

Fortune Brands faces formidable competition in each of its segments. A rise in competitive intensity can potentially result in lower margins.