Goldman Sachs Initiates Coverage On 'The Building Blocks'

Goldman Sachs has started coverage on Allegion PLC ALLE with a Buy rating and $78 price target, and Stanley Black & Decker, Inc. SWK with a Neutral rating and $120 target price.

Allegion

"ALLE is a pure play resi/non-res security leader, while SWK is a diversified construction/industrial tools manufacturer with optionality around its security portfolio," analyst Joe Ritchie wrote in a note.

The analyst noted that against a muted industrial backdrop, the analyst sees Allegion as a differentiated, stable EPS compounder that screens favorably versus peers on a variety of metrics including EBIT, organic growth, margins and returns.

The analyst's Buy thesis on Allegion is centered on the following:

• 1. "Top quartile EBIT growth over the next two years (+12 percent);
• 2. "Ccoverage leading organic growth (+5 percent) from 2015–2018E, driven by cyclical (pure construction exposure, 70 percent NA) leverage, structural (conversion to electronic from mechanical technologies) factors and share gain opportunities in the high margin commercial retrofit space;
• 3. "Through-the-cycle margins that are more resilient versus most peers (MMM the exception) and are set to expand due to solid pricing and a turnaround in Europe;
• 4. "Solid returns that we believe can improve;
• 5. "Upside from balance sheet actions given a proactive capital deployment strategy and an improving FCF profile."

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Stanley Black & Decker

On Stanley Black & Decker, Ritchie said although the company's differentiated end markets (60 percent non-industrial) are compelling in a lackluster industrial backdrop, "we believe its strong outgrowth vs. the Multis is starting to slow due to peaking auto builds."

Further, Ritchie sees only limited margin improvement in the near term and believes the potential portfolio optionality around security is a catalyst that is largely priced in.

Bottom Line

The analyst sees more runway for re-rating at Allegion because it is trading at only a 4 percent premium to the group versus a 10–15 percent premium, on average. On the other hand, Stanley Black & Decker is trading above its typical discount to the group (7 percent discount versus 10–15 percent discount typically).

"While we believe SWK could sustain this elevated multiple vs. history due to its top-quartile organic growth and returns profile in our coverage, we do not see that much upside given our 2016E/2017E EPS is +1 percent/in-line with the Street," Ritchie added.

However, the analyst acknowledged that potential portfolio optionality around security could be attractive.

For 2016, Ritchie expects EPS of $3.38 on revenue of $2.235 billion for Allegion, while projects Stanley Black & Decker's EPS at $6.40 on revenue of $11.421 billion.

At the time of writing, shares of Allegion fell 1.49 percent to $67.95 and Stanley Black & Decker also dropped 1.25 percent to $112.94 on the day.