TRG | The Bottom Line – 12/2

Just in time for next week’s investor day in NYC, Fortune Brands (FBHS) capped this past week off by announcing the $700MM acquisition of two divisions (plumbing and connected security products) of ASSA ABLOY. ASSA is selling these assets to help alleviate the DOJ’s competitive concerns of its pending acquisition of the “Hardware & Home Improvement” (HHI) division of Spectrum Brands. Fortune has proven adept at acquiring, integrating, and improving acquired companies over time, and we believe this will favorably add to this track record. The margin profile of these businesses is attractive (mid-20% range) and purchase multiple (7.8x) is attractive, and if TRG’s thesis proves out on management’s abilities, the valuation should prove very attractive. Fortune’s investor day next week will provide a look into the residential end market, and in particular, how the company is managing near-term realities of a softer market with longer term growth initiatives. Also next week, TRG will be in NYC with the top management of Armstrong World (AWI), the largest designer and manufacturer of specialty ceilings and walls systems in North America. Armstrong meetings with institutional investors should shed light on the current status of the commercial construction market, in addition to clarifying how AWI is able to generate strong cash flows even as the market is anticipated to slow down.