The Frankenstein conglomerate that is Fortune Brands
First, the good news. Management prudently hacked away at excess capacity in the home products division, shuttering plants and selling off a "non-core product line." In one of those financial ironies you just have to love, the total cost of cutting costs took a big toll, shaving $0.30 of pre-charge earnings per share down to $0.05 per share. However, this move should lead to improved profitability, which makes this quarter's earnings hit a matter of short-term pain for long-term gain.
As a shareholder, you may be more irked by the 57% quarterly dividend cut. Indeed, dividend reductions in general go down about as well as a swig from your great-uncle's basement still, and it's no comfort to be among the ranks of the dividend downtrodden who hold riskier names like Capital One Financial
Now, some words of caution on why company maneuvers may not mean that investors are out of the woods. Compared to steeper declines in the home-and-hardware and golf units, net sales in Fortune's spirits division were down only 3%. That's impressive, but to get super-excited about those results would be like mashing together Diageo
Finally, we have the minor issue of debt. Moody's sees Fortune's debt-to-EBITDA ratio pushing 4 by year-end, and is considering a one-notch rating downgrade. Plus, the company has a $2 billion revolving credit line coming due in October of 2010. If the economy -- and housing in particular -- is still sputtering along at that point, refinancing could come with unfavorable rates.
Will Fortune survive this recession? You bet. Should you buy shares now? Only if you like morning-after regret. Based on the top end of management's 2009 pre-charge earnings guidance, the stock currently trades at a 2009 P/E of roughly 16.8. That's in line with the stock's 2007 average P/E and above the 2006 average P/E of 14.5. Sorry, folks, but in light of the company's headwinds, that's no happy-hour special.
Related Foolishness:
