ByWILL SWARTS
The Company
The News
Enthusiasm for
Fortune Brands
The Deerfield Park, Ill. company boasts an enviable portfolio: hardware brands such as Moen and MasterBrand Cabinets, a spirits lineup featuring Sauza tequila and Curvoisier cognac alongside Jim Beam and golf brands including Titleist and Cobra, all household names for affluent consumers.
But the dismal state of the housing market has long been on drag on Fortune's performance, and Tuesday's announcement was only noteworthy in the sense that management said things are even worse than expected. Fortune Brands gets more than half its revenue from home and hardware, and the drag is noticeable. According to Thomson Financial, Fortune had about $8.6 billion in revenue in 2007, and is on track for $8.1 billion in sales this year, a 5% decline.
The company had already warned investors to expect a high-single-digit-to-mid-teens percentage rate drop in second-quarter earnings, which hit $1.53 a year ago. Fortune is scheduled to report earnings July 21, and said both quarterly and full-year earnings will be worse than expected.
The quarterly miss will be in the high teens to mid-20s, and that will depress full-year earnings at a high-single-digit-to-high-teens percentage rate. Fortune earned $5.11 a share in 2007.
"The environment has become more challenging for our brands and the second quarter is shaping up to be more difficult than we had anticipated," Fortune CEO Bruce Carbonari said. "April was a solid month that tracked with our expectations, followed by softer-than-anticipated results in May. We've seen continued softness in June and it's now clear that we will not make up the May shortfall."
New housing construction in May dropped for the 27th consecutive month, according to U.S. Commerce Department figures. A severe tightening of credit in the wake of the subprime mortgage meltdown has dried up financing for major home renovations, which account for about two-thirds of Fortune's home and hardware sales.
Wachovia Capital Markets analyst Jonathan Feeney on Tuesday cut his rating on the stock to Market Perform from Market Outperform.
The Analysis
Fortune enjoys a good reputation on Wall Street, where management's conservative guidance and solid communication skills go over well. That doesn't mean the company can do much about what's happening on Main Street, where people aren't spending money and may not open their wallets for a while.
"Probably 100% of their problem is macro in nature and not internal to the company," says Alex Paris, an analyst at Barrington Research.
Favor isn't following Fortune anywhere, it seems. The recent unexpected passage of a 70% Australian excise tax increase on ready-to-drink cocktails think premade bourbon and colas hits one of the company's highest-margin products in a market that accounts for 10% of its total sprits business.
The economy's being tarred with a broad brush, and much of the dirt is sticking to Fortune's prospects, wrote Robert W. Baird & Co. analyst Peter Lisnic in a Tuesday note.
"Fortune Brands' products primarily address discretionary consumer needs and are thus subject to potentially adverse changes in both personal income and consumption," he wrote. "Adverse changes in mortgage standards and interest rates could negatively impact new home construction activity as well as home and remodeling project affordability."
Carbonari said the grim environment hasn't spared any of Fortune's businesses. "With the rapid spike in gasoline prices and the decline in consumer confidence, we're seeing American consumers pull back," he said. "At the same time, the correction in the U.S. housing market has intensified. Together, this means that home-improvement purchases and home building remain soft, that many golfers are deferring 'big ticket' purchases of golf clubs, and that trading up to premium spirits brands continues in the U.S. but at a more moderate pace."
The Bottom Line
While Fortune's liquid refreshments line may prove to be an asset in these recessionary times, investors can't count on people drinking the company's woes away.
The correlation to housing is very strong, and the housing downturn is still getting worse. Fortune shares peaked three years ago, topping $95 at the height of the real estate boom. They've shed about 40% of their value since.
Paris of Barrington Research says management has simply been unable to keep pace with the housing sector's freefall. "They were already assuming a 30% decline in new home construction [revenue] in their markets, and a high single-digit decline in remodeling," he says. "Both of those were even weaker than they thought, and they'd had a fairly conservative forecast.
"This will go down as the biggest housing correction in history, and you can't prepare for that."
Fortune's products retain strong brand appeal, and haven't relinquished market share amid overall spending declines, consolations Paris attributes to management's strength.
Still, until housing picks up and nobody can say when that will happen it would be wise to wait before going another round with this consumer play.
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