Free Stock Research Report: Allegion PLC (ALLE)

Many hedge fund managers, including Barry Rosenstein of Jana Partners, Nelson Peltz of Trian Partners, David E. Shaw of D E Shaw, Eric Mindich of Eton Park Capital and Steven Cohen of SAC Capital Advisors, reported new stakes in Allegion PLC (NYSE:ALLE) during fourth quarter of 2013.

Barry Rosenstein JANA PARTNERS

Beating the market can be difficult when picking stocks on your own. One common source of alpha can be focusing on small cap stocks, which tend to outperform its larger peers over time. Another source of alpha can be following the smart money, by mimicking the trades of professional investors. Our research has shown that, by combining these two approaches – buying the most popular small-cap stocks recently purchased by hedge funds – one can outperform the market on average (read the details here).

Most, if not all, of the hedge funds that own Allegion PLC (NYSE:ALLE) received their stakes due to their ownership of diversified industrial company Ingersoll-Rand PLC (NYSE: IR). Following pressure from activist investor Nelson Peltz, IR spun-off its residential and commercial security business to shareholders in a tax-free transaction in late November 2013, resulting in a Dublin-based publicly traded company called Allegion.

With annual revenue of $2 billion, annual EBITDA of $400 million and a market capitalization of $5.2 billion, ALLE is a leading provider of global provider of security solutions for homes and businesses. Operating in a $25 billion global market that is growing 5-7% but is highly fragmented, the company plans to expand both organically as well as through acquisitions. Allegion PLC (NYSE:ALLE) boasts above-average margin and return on invested capital metrics as well as strong free cash flow generation, which it will use for reinvestment in the business, opportunistic acquisitions and capital return through dividends (10-20% payout ratio) and share repurchases (to offset dilution). During its 4Q13 earnings release, ALLE provided EPS guidance of $2.25-2.40 for 2014, which compared favorably versus the consensus estimate of $2.27.

Spin-off situations tend to be good investment opportunities, as smaller divisions of larger companies tend to be misunderstood and incorrectly valued initially. In addition, the divested company can better focus on its specific business, increasing returns for shareholders in the process. Initially, however, the spun-off stock could underperform, as investors who received the shares might not want to hold it; once this initial selling pressure is gone, the stock tends to outperform. This seems to have been the case with Allegion PLC (NYSE:ALLE), whose stock declined 16.1% over 18 days since its spin-off on November 18, 2013 versus a 1.9% return for the S&P 500. Since then, however, the stock has appreciated 34.2% versus a 7.0% return for the overall market. Currently, the stock trades at a modest premium valuation to peers on a forward P/E basis (22.8X versus 21.9X for peers). We believe this premium is justified (and perhaps too small), as the denominator (earnings) should benefit from Allegion PLC (NYSE:ALLE)’s exposure to a recovering U.S. economy, as well as opportunities to grow in international markets (which comprise approximately a third of revenue) and expand margins in Europe and Asia-Pacific. With low requirements for working capital investments and capital expenditures, the company should be able to convert more of its EBITDA to free cash flow and, potentially, increase its payout to shareholders over time. Given these fundamental drivers, and as the market gains a better understanding of ALLE as a stand-alone business, we expect the stock to continue its outperformance.

Disclosure: none

Recommended Reading:

Brian Sheehy and Iszo Capital’s Top Stock Picks

Free Stock Research Report: AerCap Holdings NV (AER)

Free Stock Research Report: URS Corp

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!