Smart Lock Launches And Bolt-On Acquisitions Will Broaden Market Reach

Key Takeaways

• Strategic acquisitions and innovative products drive revenue growth and market expansion, particularly in the resilient nonresidential segment.
  
• Strong cash generation and effective capital deployment through share repurchases and dividends bolster investor confidence in earnings resilience.
  
• Tariffs and high mortgage rates pose significant challenges, impacting revenue and margins, with currency fluctuations adding further pressure on earnings.

Catalysts

Engages in the provision of security products and solutions worldwide.

• Allegion is experiencing strong top-line growth, especially in the Americas, driven by the resilient nonresidential segment. This expansion is bolstered by multiple price increases that are expected to accelerate revenue growth throughout the year.
  
• The introduction of innovative new smart lock products, such as the Schlage Sense Pro Smart Deadbolt and the Schlage Arrive Smart WiFi Deadbolt, is anticipated to enhance Allegion's product offerings and contribute to future revenue expansion.
  
• Strategic acquisitions, including Next Door Company, Lemaar, and Trimco, are expanding Allegion's product portfolio and market reach. These bolt-on acquisitions are expected to be accretive to margins and earnings going forward.
  
• Allegion's demonstrated capability for strong cash generation and subsequent capital deployment through share repurchases and dividends underpins investor confidence in future earnings per share (EPS) growth.
  
• The company's ability to manage price and productivity against inflation and tariff pressures suggests stability in operating income margins, supporting future earnings resilience even amidst cost fluctuations.

Allegion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allegion's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.3% today to 17.6% in 3 years time.
• Analysts expect earnings to reach $774.9 million (and earnings per share of $9.39) by about July 2028, up from $621.9 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 20.7x on those 2028 earnings, down from 21.1x today. This future PE is lower than the current PE for the US Building industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

Allegion Future Earnings Per Share Growth

Risks

• Markets remain soft in the residential segment, particularly with affordability challenges due to high mortgage rates and tariffs, impacting revenue as residential demand may not recover soon.
  
• Tariffs present a potential headwind with increased costs estimated at $80 million for 2025, which could compress margins if pricing actions do not fully cover tariff costs.
  
• There is a potential mismatch between the timing of tariffs and price increases, with possible short-term pressure on earnings as pricing actions lag behind tariff impacts.
  
• Currency fluctuations serve as a headwind, negatively impacting reported revenues by 3% for the International segment, which could further impact earnings if adverse currency trends continue.
  
• Tariff volatility introduces uncertainty, and the cost mitigation strategy involving surcharges might result in margin compression longer-term if tariffs become permanent without adequate pricing adjustments.

Valuation

• The analysts have a consensus price target of $150.852 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 $170.0, 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 $4.4 billion, earnings will come to $774.9 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 9.0%.
• Given the current share price of $152.71, the analyst price target of $150.85 is 1.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.