Tuesday, January 17, 2006

Let's Make A Fortune

Recently, I have been looking to add more vice to my long-term portfolio. Everyone needs a little bit of vice in their lives. After some digging, I believe I have found a reasonably valued company in Fortune Brands (FO). They are a conglomerate with three main lines of business: Home & Hardware, Golf Products, and Wines & Spirits.

Their Wine & Spirits portfolio contains some pretty strong brands... Jim Beam, Courvoisier, Maker's Mark, Clos du Bois, Knob Creek, and Sauza to name a few. This group accounts for roughly a third of FO's revenues. According to a Credit Suisse First Boston report dated 16 December 2005, their high-end brands are gaining market share, and their recently acquired brands (Maker's and Sauza) are picking up steam.

The Home & Hardware business is their largest one. It has strong brands as well. Most of you have heard of Master Lock, and those with houses have probably heard of Moen, America's #1 selling faucet brand.

I don't know much about golf, but from what I can tell, their golf products are well received. They own such brands as Cobra and Titleist. As more and more baby boomers reach retirement, the golf industry should do well over time. The longer-term trend looks is clearly up, as measured by number of rounds played.

The valuation of FO looks reasonable, which is what attracts me to this company. A quick look shows it sports a P/E of about 17, and if we assume that next year's earnings estimates are accurate, then it has a forward P/E below 15. According to the CSFB report, FO has a 3-year median P/E around 16. The company produces a ton of Free Cash Flow, and also pays out an annual dividend yielding 1.85% at today's price of $78 a share. It also has a history of increasing its dividend every 9 to 12 months.

The primary danger is the housing market slowdown, which could potentially lead to a slowdown in the Home business. FO's ability to preserve its margins is also something to keep a watchful eye on.

I think I'm a buyer here in the $75-80 range. Not sure when I will pull the trigger, but I'm guessing soon.

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