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Allegion (ALLE) Strong on Acquisitions, FX Woes Persist

On Aug 11, we issued an updated research report on Allegion plc ALLE – a leading global provider of security products and solutions for business and domestic purposes.

The company’s share price rallied 23.9% so far this year, way higher than its industry’s 0.6%. Allegion also reported positive earnings surprises in two of the last four quarters, with an average beat of 1.95%.

The company came up with a stellar show in the recently reported second quarter, with earnings and revenues surpassing analysts’ expectations by 11% and 2.2%, respectively. Earnings were also up 12.1% from the prior-year quarter. Revenues climbed 7.2% on a year-over-year basis on the back of strong organic growth and synergies from acquisitions that were slightly offset by foreign currency impact.

In fact, the company’s first-half 2017 results were quite impressive, courtesy of higher earnings, margins and revenues driven by acquisitions and organic growth. Allegion reported adjusted earnings of $1.82 per share in the first half of 2017, highlighting an increase of 14.5% from the prior-year period on the back of higher revenues.Total revenues of $1.18 billion rose 8.1% from the prior-year period on the back of strong organic growth and benefits from acquisitions. Revenues were also up 7% on an organic basis.

Key Positives

Acquisitions are an important part of Allegion’s growth strategy. The security products industry is highly fragmented, particularly in the developing markets, and involves the use of emerging technology products that employ newer technologies. This creates numerous opportunities to broaden the product portfolio as well as geographic footprint and enhance the position in strategic market segments through buyouts. During the first as well as the second quarter of 2017, acquisitions contributed 2% to growth.

Allegion’s Americas business has been a major contributor to growth. Revenues at the Americas segment rose 9.6% year over year to $876.2 million in the first half of 2017, driven by acquisitions, favorable pricing, growth in residential markets and non-residential markets. Focused investments in channel segmentation and product innovation will continue to boost the segment.

Major Concerns

Global currency fluctuations are a major concern for Allegion. Over 25% of the company’s 2016 net revenue is derived from outside the U.S., which is expected to increase in the days ahead. Currency headwinds are thus expected to hurt 2017 revenues as well.

Allegion’s business is subject to seasonality depending on the product line. As construction and do-it-yourself projects are primarily undertaken during the second and third quarters of each calendar year in the Northern Hemisphere due to favorable weather, security product sales are higher during those quarters. So, severe rain during the second and third quarter of the year might affect this year’s sales. Also, unseasonably late warming trends in spring or early cooling trends at the year-end might impact sales.

Road Ahead

The company raised its adjusted earnings per share and revenues expectations for 2017 on strong first-half performance. Adjusted earnings per share are now expected in the range of $3.65–$3.80 versus the prior expectation of $3.60–$3.70. Also, 2017 revenue growth expectation of 6.5% to 7.5% on a year-over-year basis is higher than 5.5% to 6.5% expected earlier.

Notably, the recent earnings estimates for this Zacks Rank #2 (Buy) stock have also been encouraging, signaling at analysts’ optimism. The current year earnings estimates moved up 1.6% in the past sixty days on the back of three upward and no downward estimate revision. Also, the estimates for next year have seen three upward and no downward revision in the same time frame, lifting the consensus estimate by 0.2%.

Allegion's acquisitions, focus on innovation and strong performance of the Americas segment are likely to continue to drive performance.

Other Key Picks

Other top-ranked stocks in the same space include ASSA ABLOY AB ASAZY, Lakeland Industries Inc. LAKE and Alarm.Com Holdings, Inc. ALRM. All three companies carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Full-year 2017 earnings for ASSA ABLOY will likely increase 18.3%.

Alarm.Com’s earnings are expected to rise 43.2% in 2017.

Lakeland Industries’ fiscal 2018 earnings are likely to increase 56.6%.

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