Pershing Square: A Lock on Profits

Ali Namvar of Pershing Square, speaking for Bill Ackman, mentioned Fortune Brands Home & Security FBHS as its top idea for the company at the Value Investing Congress. The current valuation assumes minimal housing recovery over next five years, and could be worth $18-$27 per share: mid point is $22 per share, up 70% from current levels. There is minimal downside as the company can still achieve operating efficiencies even if housing does not improve. Plumbing is a particularly strong segment of the business, with its Moen brand. Moen makes faucets, a low cost way to improve the look of your bathroom. The kitchen and bath cabinet segment is "barely profitable at today's levels," Namvar said, but the company's competitors are losing money. Pershing believes this is because the segment is taking market share away from competitors. Security and storage (Masterlock), and windows and doors are also two segments that are seeing some weakness due to housing market weakness, but Fortune Home and Security can see significant upside if housing recovers. Fortune Brands Home & Security has grown every quarter since the first quarter of 2010 and is growing aggressively, winning space in places like Home Depot HD and Lowe's LOW. It also won a major contract with Martha Stewart Living. It has a very strong balance sheet, which could potentially allow it to purchase competitors, while competitors are trying to manage the downturn less aggressively than Fortune. Pershing believes that the pace of the housing recovery is slow, but that a recovery in the next several years is highly likely. Big ticket items are not doing well, but smaller ticket items, like painting and faucets are doing well, as the excess inventory in housing continues to get soaked up over time. If there is a housing market recovery, Fortune Brands Home & Security $4 billion on 1 million in housing sales, nearly double what it is currently. If housing starts reach a normal level of 1.5 million, Fortune Brands Home & Security could see revenues of $5 billion. If there is no housing market recovery, the company can continue to cut costs and could potentially reach 10% EBITDA. If the housing market does not recover by 2014, Fortune Brands Home & Security could be worth $14 per share. If there is a partial recovery by 2016, Fortune Brands Home & Security could be worth $18 per share. If there is a full, normalized recovery by 2016, Fortune Brands Home & Security could be worth $27 per share.