Why security company Allegion is a smart investment

In this age of rising identity theft and malicious hacking, cyber security is becoming a particularly hot topic of interest. Not only among cyber security experts but even with lay people concerned about the safety and security of their personal details and sensitive information.

Away from the limelight of cyber security, the world of mechanical and electronic security is also experiencing growth. A recent industry report estimated that sales of mechanical security products are expected to rise 5.4% annually through 2020 to US$6.1 billion.

One company that is capitalising on this growing industry is Allegion Plc, which is listed in the New York Stock Exchange (NYSE) and is a constituent of the S&P 500 Index.

On November 26, 2019, Allegion's share price closed above US$120 for the first time.  This is way above analysts' expectations and forecasts based on the prior month's October 2019 financial results.

Who is Allegion and what does it do?

Allegion manufactures and sells mechanical and electronic security products for homes and businesses worldwide.

The company produces door closers and controls; doors and door systems; electronic security products; electronic, biometric and mobile access control systems; exit devices; locks, locksets, portable locks, and key systems; time, attendance, and workforce productivity systems; and other accessories.

With the coming of advanced technology, Allegion said it's also expanding into biometrics, special surfaces, video surveillance, wireless connectivity, cloud technology and other electronic safety solutions.

The Dublin-based company boasts of about 30 brands under its umbrella of products. With more than 700 global active patents, the company operates in 130 countries. It has a wide network of 10,000 channel partners and 11,000 employees.

Corporate history and expansion

Allegion spun off from Ingersoll Rand Plc (an Irish diversified manufacturing company) in December 2013 and became publicly traded company. It was included in the S&P 500 index that year.

A year after it listed on the New York Stock Exchange (NYSE), Allegion acquired various assets of Schlage Lock de Colombia S.A., the second largest mechanical lock manufacturer in Colombia. The acquisition boosted Allegion's presence in Colombia where it now has more than 350 employees.

Aside from its core security business, Allegion also launched a venture capital fund - Allegion Ventures - in March 2018. According to a company statement, the idea behind the fund, is to 'invest in early stage companies in the sectors (of) security and smart access.'

Strong financials

During its October reporting period, Allegion showed a strong set of financial data including:

• Q3 2019 net earnings per share (EPS) of $1.40, vs 2018 EPS of $1.21;
• Adjusted 2019 EPS up 19.5% vs 2018 adjusted EPS
• Q3 2019 revenues of $748.3 million, up 5.2%
• Q3 2019 operating margin of 22.5%, vs 2018 operating margin of 20%
• Q3 2019 operating income was $168.1 million, an increase of $25.8 million or 18.1% vs 2018 operating income
• Year-to-date 2019 available cash flow was $230 million, an increase of $1.4 million versus the previous year

In an interview after the release of the company's financial results, Allegion CEO David D. Petratis said: "I am extremely pleased with our third-quarter performance."

He added: "Our ability to execute price and productivity actions, combined with solid volume leverage, drove the increase in year-over-year margins."

In his statement Petratis said the Americas delivered healthy fundamentals, particularly in the non-residential segment of the markets.

Analyst views on Allegion

Last October several analysts and market research houses issued reports and forecasts for Allegion, which confirmed a bullish outlook.

• Morgan Stanley boosted their price target on Allegion from $100 to $105 and gave the company an "equal weight" rating on October 25.
• Zacks Investment Research upgraded Allegion from a "sell" rating to a "buy" rating and set a $120 price target for the company
• Wells Fargo & Co boosted their price target on Allegion from $115 to $125 and gave the company an "outperform" rating
• Barclays restated a "buy" rating and issued a $120 price target on shares of Allegion
• Imperial Capital boosted their price target on Allegion from $105 to $116 and gave the company an "in-line" rating

If you look at the chart of Allegion's share price you will see that most of the analysts' forecasts have already been met and in most cases surpassed. A long-term upward trend has been firmly established over the past six years.

With 2019 seeing a sustained break above the US$93-95 region and more recent probes above US$120 accelerating the upward trend, we see the potential for this stock to advance further in the months and years ahead.

One particular analyst issued a positive report on Allegion which said: "It's good to see that Allegion has rewarded shareholders with a total shareholder return of 33% in the last 12 months. And that does include the dividend."

Industry outlook

Given the company's solid performance for 2019, it is not surprising that the management team at Allegion re-affirmed their full-year 2019 revenue outlook for total and organic growth to a range of 4.5 to 5.5% compared to 2018.

A recent industry report from market research company Freedonia Group estimated that in the US alone, demand for mechanical locks is expected to rise 5.4% annually over the next few years.

In the report, Freedonia said: "Growth will be driven by the large lock segment, which will benefit largely from continued gains in building construction spending. Advances in value terms will be aided by the ongoing shift to higher value electrified products, particularly door locks and door security hardware that are used with electronic access control systems."

Conclusion

Given Allegion's solid performance over the past 12 months plus the healthy outlook for the mechanical and electronic security industry, the company seems well-placed and on track for further growth. We consider it a buy.

Get stories like this in our newsletters.