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 Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations 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!