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Allegion Shares Up 55.1% YTD: What's Driving the Rally?

Zacks Equity Research

Shares of Allegion plc ALLE have rallied around 55.1% so far this year. The company has significantly outperformed its industry’s rise of 36% over the same time frame.

The Zacks Rank #3 (Hold) stock, which has a market cap of roughly $11 billion, has impressed investors with its recent earnings streak. It surpassed estimates thrice in the four trailing quarters, the average positive surprise being 2.17%.

We believe that the company has several growth drivers in place and enjoys a robust foothold in its served markets. These should help it maintain momentum in the quarters ahead.

Growth Drivers

Allegion has been strengthening its product portfolio to keep up with the changing market sentiment toward electronic security products and solutions. Notably, sales of electronic security products are growing at a steady rate compared with the traditional mechanical counterparts. For instance, robust demand for the company’s Schlage Encode residential lock product will be beneficial. Also, the company expects its smart WiFi deadbolt product to boost revenues of its residential business. In addition, it is trying to chalk out channel strategies, invest in digital demand creation and gain enterprise excellence to accelerate core market expansion.

Also, Allegion is witnessing strength in non-residential business, led by solid institutional markets and improving residential markets in the Americas along with pricing benefits.

Trend in Estimate Revisions

The Zacks Consensus Estimate for 2019 earnings for Allegion has climbed nearly 1.2% over the past 60 days from $4.83 to $4.89. For the year, four estimates have been being revised upward in the past couple of months against none downward. Also, over the same time frame, the consensus estimate for 2020 has been raised 1.1% to $5.35 with two estimates trending upward versus one downward.

Upbeat Q3 Performance

Allegion reported adjusted earnings per share of $1.47 in third-quarter 2019, marking a 19.5% year-over-year improvement. Moreover, the figure beat the Zacks Consensus Estimate by 10.53%. This earnings improvement is primarily attributable to a solid revenue growth. The company predicts adjusted earnings per share of $4.85-$4.90 for 2019, higher than $4.80-$4.90 predicted earlier.

However, a highly leveraged balance sheet is a concern for Allegion. The company had long-term debt of $1,427 million at the end of the third quarter, reflecting 1.2% increase from the 2018 end level. Also, in the quarter, interest expenses jumped 11.4% year over year. Also, the company seems to be more leveraged than the industry, with respective long-term debt-to-capital ratio of 67.5% and 38.2%.

Key Picks

Some better-ranked stocks from the Zacks Industrial Products sector are Actuant Corporation EPAC, Brady Corporation BRC and Cintas Corporation CTAS. All these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Actuant pulled off average positive surprise of 13.36% in the last four quarters.

Brady pulled off average positive surprise of 9.67% in the last four quarters.
Cintas pulled off average positive surprise of 8.50% in the last four quarters.

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