Rising Star Buy: Fortune Brands

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

This article is part of our Rising Star Portfolios series.

Tomorrow I'll be buying shares of Fortune Brands (NYSE: FO  ) as part of my Special Situations portfolio. The company is set to spin off its home and security business later this year, leaving the spirits business, which will be renamed Beam. I think the market is still not recognizing the value of these two remaining parts of the business. But I'm particularly interested in the liquor business.

As I explained last month, when I ran a valuation on Fortune, I expect the freestanding spirits company to eventually be acquired. Diageo (NYSE: DEO  ) looks like the likely contender, as it seeks to fill a hole in its liquor portfolio with Fortune's bourbons and compete with Brown-Forman's (NYSE: BF-B  ) Jack Daniels on the global stage. I've also seen interest from Pernod Ricard, but that company is more highly leveraged than Diageo.

Currently, I've figured that Fortune's liquor business is trading for less than the average price multiple for takeovers in the last decade. But the liquor unit's operating profit is still depressed well below levels seen in 2006 and 2007, and so I expect a multiple to come in higher than it might otherwise, in order to reflect the unit's ability to generate profit. In addition, the value of an acquisition for a bigger player will come through leveraging its own distribution, meaning that an acquirer can pay up for Fortune and still realize value.

Even if a takeover doesn't come to pass, the liquor business is a solid franchise that I expect will continue to create shareholder value over the long term. And with the company soon to be trading as a pure play and the attractive economics of the liquor business, I wouldn't be surprised to see the multiple expand as well.

While I'm less interested in the home and security business, it still looks attractively priced, too. Its earnings are heavily depressed now compared to the boom years, so a purchase here looks like a value, compared to what the business is capable of earning when times are good. Even better, Fortune has taken initiatives to cut costs and streamline the business. I calculated that the unit is being valued at roughly five times EBITDA, cheaper than peers Masco (NYSE: MAS  ) and Owens Corning (NYSE: OC  ) at 10 and 16 times, respectively.

So tomorrow I'll be buying $1,000 of Fortune Brands, or about 6% of my total capital.

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. The Motley Fool owns shares of Diageo. Motley Fool newsletter services have recommended buying shares of Diageo and Fortune Brands. 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.

Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1525064, ~/Articles/ArticleHandler.aspx, 10/24/2016 8:37:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
FO.DL2 $0.00 Down +0.00 +0.00%
Fortune Brands CAPS Rating: *****
BF-B $45.00 Down +0.00 +0.00%
Brown-Forman (B Sh… CAPS Rating: ****
DEO $108.24 Down +0.00 +0.00%
Diageo CAPS Rating: *****
MAS $33.09 Down +0.00 +0.00%
Masco CAPS Rating: **
OC $51.50 Down +0.00 +0.00%
Owens Corning CAPS Rating: ***