Two important questions to ask before you buy Fortune Brands Home & Security Inc (NYSE:FBHS) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the building products industry, FBHS is currently valued at US$7.69b. Today we will examine FBHS’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
Fortune Brands Home & Security generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
The two ways to assess whether Fortune Brands Home & Security’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Along with a positive operating cash flow, Fortune Brands Home & Security also generates a positive free cash flow. However, the yield of 3.7% is not sufficient to compensate for the level of risk investors are taking on. This is because Fortune Brands Home & Security’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does FBHS’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 52.3%, ramping up from its current levels of US$566.4m to US$862.7m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, FBHS’s operating cash flow growth is expected to decline from a rate of 22.4% in the upcoming year, to 9.8% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Fortune Brands Home & Security as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Fortune Brands Home & Security to get a better picture of the company by looking at:
- Valuation: What is FBHS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FBHS is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Fortune Brands Home & Security’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.