Expanding Electronic Solutions Like Schlage Smart Locks Will Strengthen Future Market Leadership

Key Takeaways

• Allegion's aggressive R&D and new product focus, alongside strategic acquisitions, positions it for revenue growth and market leadership enhancement.
  
• Share repurchases and capital deployment strategies are set to increase shareholder value and enhance earnings per share.
  
• Macroeconomic challenges and reliance on acquisitions may hinder Allegion's growth, impacting revenue, margins, and earnings.

Catalysts

Engages in the provision of security products and solutions worldwide.

• Allegion's strategic focus on expanding its product portfolio through significant R&D efforts and new product launches, such as the Schlage XE360 series and Schlage Smart Lock integration with Airbnb, is expected to drive revenue growth and enhance its market leadership position.
  
• The company's proactive approach to M&A, with accretive acquisitions like Krieger Specialty Products and the recent announcement to acquire Lemaar, suggests a strong pipeline that could positively impact revenue growth and strengthen its core mechanical and electronics portfolio.
  
• Allegion's emphasis on capital deployment and returning cash to shareholders, while continuing share repurchases, could boost earnings per share and shareholder value as a result of reduced share count and efficient balance sheet management.
  
• The ongoing strength and stability in institutional markets, particularly in education and health care sectors, supported by strong municipal bond issuance, provides a favorable backdrop for revenue growth in Allegion's nonresidential business.
  
• Allegion's focus on expanding its electronic solutions and leveraging its expertise in specification capabilities is likely to contribute to improved net margins, as the electronic segment typically commands higher margins than traditional mechanical products.

Allegion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allegion's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.8% today to 18.4% in 3 years time.
• Analysts expect earnings to reach $769.1 million (and earnings per share of $9.23) by about March 2028, up from $597.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from 18.5x today. This future PE is lower than the current PE for the US Building industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.16%, as per the Simply Wall St company report.

Allegion Future Earnings Per Share Growth

Risks

• Challenges in the International segment, particularly in Germany and China, where economic conditions are weak, could hurt organic revenue growth and operating margins.
  
• The impact of new tariffs or changes in trade policies, especially related to materials sourced from China and Mexico, could increase costs and may require difficult pricing adjustments to maintain net margins.
  
• Allegion's growth heavily relies on capital allocation for acquisitions and new product development, which introduces execution risk if expected synergies or product performance do not materialize, impacting earnings.
  
• The Americas recorded stronger performance partially due to pull-forward among residential customers from purchase ahead of inflation and tariffs, leading to potential future quarterly revenue volatility if demand normalizes.
  
• A projected flat growth in Allegion International in 2025 due to macroeconomic challenges, along with foreign currency headwinds, could limit overall revenue growth and net income.

Valuation

• The analysts have a consensus price target of $141.565 for Allegion based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $165.0, and the most bearish reporting a price target of just $110.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $769.1 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 9.2%.
• Given the current share price of $127.98, the analyst price target of $141.57 is 9.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.