Von Duprin 70 Series Launch And SOSS Acquisition Will Strengthen Future Performance

Key Takeaways

• Allegion's strategic acquisitions and innovations are anticipated to bolster revenue through expanded market coverage and high-margin solutions integration.
  
• Strong cash flow and capital allocation strategies enhance Allegion's financial flexibility, supporting future growth and shareholder value.
  
• Ongoing supply chain issues, interest rates, and international market softness threaten Allegion's revenue growth, compounded by inflationary pressures and dependency on variable institutional funding.

Catalysts

Manufactures and sells mechanical and electronic security products and solutions worldwide.

• Allegion's introduction of new product lines, such as the Von Duprin 70 series, and focus on innovation for expanding core markets are expected to drive organic revenue growth through increased demand and market coverage.
  
• The acquisition of SOSS Door Hardware is projected to be accretive to earnings per share (EPS) in 2025, which should positively impact future earnings by augmenting the company's mechanical portfolio with high-margin solutions.
  
• Allegion's commitment to capital deployment, including share repurchases and dividends, suggests ongoing efforts to improve earnings per share and return value to shareholders, which could enhance future EPS growth.
  
• The company's focus on expanding its electronics segment as a long-term driver indicates potential future revenue growth, given electronics' expected high single to low double-digit growth over the cycle.
  
• Allegion's stable financial position, strong cash generation, and low net debt to adjusted EBITDA ratio provide flexibility for future investments and acquisitions, which can contribute to revenue and earnings growth.

Allegion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allegion's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.4% today to 17.2% in 3 years time.
• Analysts expect earnings to reach $758.5 million (and earnings per share of $9.03) by about January 2028, up from $572.0 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 20.5x on those 2028 earnings, up from 20.1x today. This future PE is about the same as the current PE for the US Building industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 1.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.74%, as per the Simply Wall St company report.

Allegion Future Earnings Per Share Growth

Risks

• The reduction in electronics revenue due to past supply chain disruptions suggests potential ongoing volatility in this segment, which could impact future revenues and net margins.
  
• The slowdown in multifamily markets linked to higher interest rates might lead to softer performance in the Americas segment, affecting overall revenue growth and earnings.
  
• The company’s exposure to international markets, where macroeconomic indicators remain soft, might limit organic revenue growth, impacting future earnings potential.
  
• Allegion acknowledges ongoing inflationary pressures, which require price increases to maintain margins. Customer fatigue over continual price hikes could hinder revenue growth and profit margins.
  
• The continued dependency on institutional markets, notably education, which relies on variable funding mechanisms like municipal bonds, could expose Allegion to cyclicality risks, impacting revenue stability and earnings.

Valuation

• The analysts have a consensus price target of $143.75 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 $4.4 billion, earnings will come to $758.5 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 8.7%.
• Given the current share price of $132.11, the analyst's price target of $143.75 is 8.1% higher. 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.