TRG | The Bottom Line – 7/1

This week we focused on Fortune Brands and the anticipated spinoff of its Cabinet unit, leaving the “remain-co” comprised of Water Innovations and Outdoors & Security Segments. The implied valuation for the remain-co is quite cheap in our view on an absolute basis (“combined/current” FBHS now sells at 9-10x). We look at relevant predecessors that separated the very good businesses from the less good or not good businesses – Masco and Armstrong World Industries. While the separations in these cases were predictably going to highlight value at the “remain-cos” (due to the best businesses being in the “remain-cos”), it took time for this to be appreciated by the market. The high-quality businesses in the remain-cos had strong market positions, strong pricing power, high returns on capital, and abundant free cash flow. We believe FBHS has these too in Water Innovations and Outdoor & Security units (products: plumbing, composite decking, exterior doors, security), as well as a robust overall growth profile. As the Armstrong stock chart above demonstrates, sometimes it takes a transformative separation event for value to be recognized.