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Allegion (ALLE) Down 5.6% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Allegion (ALLE). Shares have lost about 5.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Allegion due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Allegion Q1 Earnings Beat, Surge Y/Y on Higher Sales

Allegion reported better-than-expected results for first-quarter 2023. ALLE’s earnings surpassed the Zacks Consensus Estimate by 17% and sales beat the same by 8.5%.

Adjusted earnings in the quarter under review were $1.58 per share, surpassing the Zacks Consensus Estimate of $1.35 per share. The bottom line increased 39.8% from the year-ago period’s $1.13.

Revenue Details

In the quarter under review, Allegion’s revenues were $923 million, reflecting growth of 27.6% from the year-ago quarter. Organic sales in the quarter increased 15% driven by robust price realization and strong volume in the Americas non-residential business.

However, the result was partially affected by weakness in the Americas residential mechanical and certain international businesses. Acquired assets boosted sales by 14.1%. Forex woes left an impact of 1.5% on revenues. Allegion’s revenues surpassed the Zacks Consensus Estimate of $851 million.

ALLE reported revenues under two segments. A brief discussion of the quarterly results is provided below:

Revenues from Allegion Americas increased 42% year over year to $740.9 million. It accounted for 80.3% of the quarter’s sales. Our estimate for segmental revenues was $675.9 million. Organic sales increased 22.6% year over year driven by strength in price realization and volume growth in residential and non-residential businesses.

The acquisition contriuted 19.8% to the total sales growth. However, forex woes left an impact of 0.4% on revenues.

Revenues from Allegion International were $182.1 million in the quarter, decreasing 9.7% year over year. The metric accounted for 19.7% of the quarter’s sales. Our estimate for segmental revenues was $175.4 million.

Organic sales decreased 4.8% year over year, while foreign currency translation had a negative impact of 4.4% on sales.

Margin Profile

In the reported quarter, Allegion’s cost of sales grew 22.3% year over year to $532 million. The cost of sales was 57.6% of the quarter’s net sales. The gross profit increased 35.4% year over year to $391 million, while the gross margin jumped 250 basis points (bps) to 42.4%.

Selling and administrative expenses increased 28.1% year over year to $220 million. The metric represented 23.8% of net sales in the reported quarter, compared with 23.7% in the year-ago period. Adjusted earnings before interest, tax, depreciation and amortization were $139.6 million, reflecting a year-over-year increase of 38.9%. The margin increased 120 bps year over year to 15.1%.

The adjusted operating income in the quarter increased 48.7% year over year to $192.4 million. The adjusted margin was 20.8%, up from 17.9% a year ago. The results were attributable to the positive price and productivity net of inflation and investments, positive business mix and volume leverage associated with non-residential growth in the Americas segment.

Interest expenses were $23.6 million, up 98.3% year over year due to increased debt as a result of the Access Technologies acquisition. The effective tax rate in the quarter was 16.3%, up from 13.2% in the year-ago quarter.

Balance Sheet and Cash Flow

While exiting the first quarter of 2023, Allegion had cash and cash equivalents of $292.8 million, down 1.7% from $288.0 million at the end of fourth-quarter 2022. Long-term debt increased 45.6% to $2,109.3 million from $2,081.9 million at the end of fourth-quarter 2022.

In the first three months of 2023, ALLE generated net cash of $69 million from operating activities, increasing 236.6% from the previous year’s level. Capital expenditure was $22.3 million, increasing 156.3% year over year. The free cash flow was $46.7 million for the first three months of 2023.

In the same time period, Allegion did not repurchase any shares. Dividends paid out totaled $39.4 million, reflecting an increase of 10.1% from the previous year’s level.

Outlook

For 2023, Allegion expects full-year revenues in the range of 11.5-13.5%, compared with 9-10.5% predicted earlier. However, the company anticipates organic sales in the range of 5.5-7.5%, compared with 2.5-4.5% expected earlier.

Earnings are predicted to be $5.95-$6.15 per share, compared $5.70-$5.90 per share predicted earlier. Adjusted earnings are likely to be $6.55-$6.75 per share, compared with $6.30-$6.50 per share expected before.

The company continues to expect a free cash flow of $480-$500 million, compared with $470-$490 million predicted earlier. The tax rate in the year is expected to be 15-15.5%.

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How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

At this time, Allegion has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. It comes with little surprise Allegion has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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