What's Fortune Got Up Its Sleeve?

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Fortune Brands (NYSE: FO  ) , unwieldy beast of many heads, why must you be so complicated? The name behind premium golf, home, and spirits brands is on the chopping block after Pershing Square's Bill Ackman revealed a huge stake in the company late last year and began pushing for change. The company soon after announced that it was looking at spinning off or selling its divisions. While the stock has been stuck in neutral for months, there's a lot to like about the underlying assets.

Fortune has strong brands in each of its three business units -- golf, home and security, and spirits. The golf unit features Titleist, while the home and security business offers Moen and Master Lock, among many others. The spirits division is quite a jewel, with global brands Jim Beam (the top bourbon), Maker's Mark (the top super premium bourbon), Sauza (the No. 2 tequila), and Courvoisier, among many other national and regional brands.

U.K. spirits giant Diageo (NYSE: DEO  ) is especially interested in Jim Beam, according to published reports. Other global players such as Pernod Ricard have also expressed interest in Fortune's spirits division. Diageo thinks it could build up Jim Beam to more effectively play against Brown-Forman's (NYSE: BF-B  ) Jack Daniel's brand, which has a global scope.  

Fortune's exposure to discretionary spending is worth noting. A weakness in the company has been its home and security portfolio, less because of the business itself than the overall economic climate and the housing debacle. Rivals such as American Woodmark (Nasdaq: AMWD  ) and Masco (NYSE: MAS  ) have seen losses for three years running, while Fortune's division has rebounded to solidly positive territory in the last two. Moreover, there's reason to be optimistic for each of these players, with the BuildFax Remodeling Index continuing to tick up month after month.  

Even the golf division remained profitable on an annual basis throughout the tough times, something rival Callaway Golf (NYSE: ELY  ) can't boast. With times becoming more flush, it's easy to see better performance from each of these players.

And as the economic climate improves, it opens a major opportunity for Fortune to expand its key liquor brands and increase profitability at its home and security unit. In the boom times, home and security earned more operating profit than the spirits business. That's a powerful driver for future returns, should the economy return to normal, whether home and security is a separate business or not.

A major threat for the spirits business is increased taxation, especially as states continue to see shortfalls in their budgets. Sin taxes are an easy sell, even in good times. And of course, there's the ongoing branding and marketing from other liquor companies ready to make their mark.

So with a major transaction on the horizon, there's a lot to like about Fortune now. I'm especially intrigued by the interest shown by Diageo and Pernod Ricard. That's part of the longer-term consolidation of the industry, and one that still looks profitable for investors in Fortune, even at this late date.

Interested in Fortune Brands or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.

Jim Royal, Ph.D., does not own shares of any company mentioned here. Fortune Brands is a Motley Fool Stock Advisor selection. Diageo and Masco are Motley Fool Income Investor recommendations. The Fool owns shares of Diageo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 21, 2011, at 4:41 PM, fortunebrands99 wrote:

    Peer valuation for Fortune's Spirits, Home and Golf units yield $82 fair value and that's excluding instrinsic value associated with eliminating $90 million of Fortune overheads which would throw off another $7 per share based on a 12 multiple

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