Property owners’ concern about security has boosted the fortunes of Allegion (NYSE: ALLE), a leader in providing locks, exit devices, and door controls.
Its stock has generated total annualized returns of 22.4% for the last year, 16.6% for three years, 8.5% for five years, and 10.2% for 10 years. That beats almost all of its competitors, though not the S&P 500, outside of the one-year return.
Allegion has renowned brands in residential and commercial markets. Brand reputation is very important in the security business, as a product failure can have devastating consequences for customers.
In the Americas (the U.S., Canada and Mexico), which account for 80% of the company’s revenue, its market-leading or near-market leading brands include Schlage for locking systems, Von Duprin for exit devices, and LCN for door controls.
“Allegion’s brands have garnered meaningful brand equity, which supports pricing power,” writes Morningstar analyst Nicholas Lieb. He calculates that its price increases in the Americas have topped inflation by an average above 150 basis points for the past 10 years.
Profit margins, return on capital
That has led to hefty profit margins. Allegion’s operating margin has averaged around 19.5% over the last five years, topping its competitors. The operating income margin registered 21.8% in the third quarter. Revenue jumped 10.7% in the quarter from a year earlier, to $1.07 billion, and earnings per share gained 9.5%.
Since its spinoff from industrial conglomerate Ingersoll-Rand in 2013, Lieb estimates Allegion has generated average returns on invested capital of 24%, well above its cost of capital. The Americas segment has recently scored ROIC of 30%-35%. He believes that range can be maintained.
However, for the international segment, he sees returns barely exceeding cost of capital, as it “lacks sufficient scale to generate durable excess returns.”
Allegion has used acquisitions to fuel its growth. In August, it bought UAP, a U.K. door hardware specialist, and another U.K. company, Brisant, which sells a range of residential security solutions. Allegion bought three other companies earlier in the quarter. It has jumped on the trend toward digital security, with 26% of its revenue coming from electronic products.
Tight network
Allegion has strong relationships with its channel partners in North America, Lieb notes. That includes architects, homebuilders, security integrators, general contractors, and locksmiths.
“Allegion’s deep relationship with architects — often the primary decision-makers for commercial project specifications — has been a key factor in the firm’s strong commercial market presence,” he said. “Architecture firms have increasingly outsourced the design and product specification of building openings to Allegion.”
The company also has a large presence in big-box retailers, such as Home Depot (NYSE: HD), Lowe’s (NYSE: LOW), and and e-commerce platforms, such as Amazon (NASDAQ: AMZN). That broad network creates a potent barrier to entry for potential competitors to Allegion, Lieb notes.
Looking forward, “the Americas non-residential markets remain resilient, and Allegion is performing well in the aftermarket,” the company’s CEO John Stone said in its Oct. 23 earnings conference call. “Residential markets, however, remain soft.”
Meanwhile, “International markets have largely been unchanged year-to-date, and we continue to expect roughly flat organic performance.” So the Americas will have to keep supplying the growth for Allegion.
Comments