Amid a more bullish outlook on the U.S. new construction cycle, Bank of America Merrill Lynch has adopted a bullish stance on homebuilders, but remains cautious on building product manufacturers.
The Analyst
Analyst John Lovallo downgraded Fortune Brands Home & Security Inc FBHS from Neutral to Underperform and lowered the price target from $64 to $61.
The Thesis
Fortune Brands shares have less relative upside to BofA's price objective than other stocks in its coverage, Lovallo said in the downgrade note. (See the analyst's track record here.)
The lowered price target is based on a 10 times multiple of Fortune's estimated adjusted EV/EBITDA, suggesting about 9-percent upside to Thursday's closing price, the analyst said.
The average upside to BofA's Neutral-rated building products stocks is 20 percent, meaning that Fortune now deserves a bearish rating, Lovallo said.
The potential for more favorable price/cost realization than BofA is modeling poses risks to the downgrade, the analyst said. Additional upside risk comes from the company's near-term expansion of its plumbing business organically or through strategic acquisitions, he said.
The Price Action
Fortune Brands shares have lost about 18 percent in the year-to-date period.
Related Links:
Raymond James Upgrades Homebuilder D.R. Horton After 'Strong' Q3
Imperial Capital Finds 5 Reasons To Like Construction Partners
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