Allegion: Turning Keys, Unlocking Future
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Competitive Advantages, Opportunities and Risks
1. Key Facts
Description: Allegion plc (“ALLE”, “Allegion”, “Company”) with ticker $ALLE is a leading provider of ‘security products and solutions that keep people and assets safe and secure in the places they live, learn, work and visit’.
Key Financials: Over the period FY13 to trailing twelve months (“TTM”) Q2 FY23, the Company depicted a net revenue Compound Annual Growth Rate (“CAGR”) of 6% and operating income CAGR of 6.7%, reaching a TTM revenue of $3.61B and operating income of $711M (margin of 19.7%). Allegion has cash and short-term investments of $323M compared to total debt and lease liabilities of $2.2B.
Price & Market Cap (as of 21th August 2023): Its market cap is $9.4B with a 52-week low of $87.33 and a 52-week high of $128.36, whereas it currently trades at $107.4.
Valuation: Allegion trades at a TTM EV/EBITDA of 14x (10 Year average of 16.9x) and a TTM EV/Sales of 3.1x (10 Year average of 3.6x).
2. Business Overview
Allegion plc is a leading provider of security products/solutions for residential homes, commercial businesses (hospitality, retail, office) and institutions (education, healthcare, government, campuses) providing among others Door controls and access control systems, locks, locksets and electronic security products.
Source: Allegion 10K 2022
Allegion’s history as a public company is short as it was spun off from Ingersoll Rand Plc on 1 December 2013 (the “Spin-off”). David D. Petratis was appointed as the Chief Executive Officer and President of the Company in August 2013 and lead the Company until July 2022. Following his retirement he was succeeded by John H. Stone (more about him later) who currently leads Allegion.
Despite having a short history as a public company, its roots go back to over a century with Von Duprin (acquired by Ingersoll Rand in 1974), one of its key brands, being the inventor of the “panic release bar” exit device in 1908, Schlage (acquired in 1974) was founded in 1920 and was awarded the 1st patent for both cylindrical and push-button locks while CISA (acquired in 2004) was founded in 1926 and patented the first electrically controlled lock.
Among others, notable steps in its recent history is the adoption of Internet of Things (“IoT”) solutions in 2014 through Schlage sense launch, Overtur launch in 2017 (a cloud-based suite of tools that helps architects and door hardware consultants to collaborate on specifications and the security design of doors and openings), the launch of Allegion Ventures fund in 2018 to invest in upcoming technologies to make smarter solutions and its largest acquisition (~$900M) of Stanley Access Technologies in 2022 (“Access Technologies”), a leading provider of automatic doors which patented the first hands-free door operator in 1931.
Since the Spin-off, i.e. over the period 2014 to 2022, Allegion managed to grow sales by a CAGR of 5.6%, of which 4.7% was organic. During the same period adjusted earnings per share increased by a CAGR of 11.3%.
As of today, its portfolio comprises of ~30 brands with key brands such as CISA, Interflex, LCN, Schlage, Simons Voss and Von Duprin, holding key market positions in their primary product categories and over 1,000 global active patents.
Source: Investor Day presentation, May 2023
The Company operates under two reporting segments, namely, Allegion Americas and Allegion International (primarily Europe, Asia and Oceania) while it also provides revenues by nature, like Mechanical Products, Electronic Products and Services and Software.
Revenues by nature
Allegion shall not be perceived as a mechanical products only company since Electronics account for a respectable 26% of FY2022 revenues.
Source: Stratosphere.io (use coupon code STOCKOPINE for a 25% discount), StockOpine analysis | Notes: Electronic products include all electrified product categories, including, electronic and electrified locks, access control systems, time, attendance and workforce productivity solutions and electronic and electrified door controls and systems and exit devices. Services and software include inspection, maintenance and repair, design and installation, aftermarket and locksmith services, as well as SaaS offerings.
Electronics will play a vital role on the future success of Allegion as the world becomes more digitalized. Although there was a decline in the sales mix of electronics in 2022 due to a slower growth rate (8.8%) compared to Mechanicals (12.6%) and Services & Software (231%), it is worth noting that electronic parts shortages severely impacted growth. Over the most recent quarter, Allegion reported that the supply chain is again healthy and Electronics in Americas grew by ~40% (compared to high teens in 2022).
Adoption of electronics is still at the early innings, reportedly at ~10% for North America, ~5% for EMEA and ~8% for Australia/ New Zealand providing a massive opportunity for growth as consumers adopt new technologies.
“Electronics, when you think about the electronic smart lock component of that, certainly growing at the high single digit, near double-digit levels over the next foreseeable future as adoption of that business -- or adoption of electronics in the residential space continues to increase.” Dave Illardi Senior Vice President of Allegion Americas
Source: Investor Day presentation, May 2023
The greater adoption, albeit slow, of Electronics brings new non-traditional technology competitors for the Company, however, ALLE has shown that innovation is at the core of its culture with recent examples being the Schlage Encode Plus™ Smart WiFi Deadbolt (smart lock), CISA Domo Connexa (smart door), Schlage Mobile Student ID (access and payments virtual ID leveraging NFC technology and being eco-friendly) and Zentra (smart access solution for multifamily buildings) while acquisitions is another lever to maintain competitiveness.
In terms of profitability, Electronics and Mechanical exhibit relatively similar gross margins.
Regarding Service and Software, the increase in revenue mix for 2022 (from 1.2% to 3.4%) is a result of the acquisition of Access Technologies in mid-2022. In H1 2023 where revenue mix is more relevant, services account for 5.1% of total sales. Services is an interesting and recurring segment, though labor shortages and high skills required make the expansion a slow process.
Source: Stratosphere.io (use coupon code STOCKOPINE for a 25% discount) | Our go-to platform when we need granular information to analyze a company. Quick and easy access to KPIs, StockOpine analysis
The Americas is Allegion's largest segment, accounting for 78% (FY22: $2,552 million) of the Company's FY22 revenue compared to 72% in FY21 and average 74% since Spin-off. Over FY13 to Q2’23 TTM, the segment generated a CAGR of 7% while operating margin averaged at 26.7% with FY21 and FY22, showing lower margins of 25.3% and 24%, respectively.
The main reason of the change in mix over FY22 was the acquisition of Access Technologies ($186M or 5.7% of FY22 sales) that is reported under Allegion Americas and the negative growth observed for the International segment as a result of the softening of demand in Eurozone countries and the currency exchange rate impact.
Americas’ accelerated growth observed in FY22 was mainly a result of pricing (11.4%) to combat inflation pressures and Access Technologies acquisition (9%), with the remainder being non-residential volume driven. For the H1 2023 the impact of Access Technologies is more profound at 18%. It is worth mentioning that during FY17 to FY21, the cumulative growth from price, volume and acquisitions, were relatively in par at 9.2%, 8.0% and 7.1%, respectively.
Looking at the breakdown of Americas’ revenue we observe a diversified portfolio with its large installed base and long-standing relationships providing headroom against shortcomings in one category. For example, in FY22 residential revenue had a low single digit decline due to softening of demand (low consumer confidence, higher rates) but was offset by the growth in non-residential.
Source: Investor Day presentation, May 2023 | Note: FY22 revenues
Going back to margins, the drop in recent years was ultimately an Access Technology (lower margins) impact, acquisition related expenses and cost inflation impact above the pricing and productivity improvements, implying that the pricing power weights more to the suppliers (justified by supply bottlenecks on the electronic parts) and possibly the big retailers rather than on Allegion. Nonetheless, improvements in pricing and productivity start to pay off in H1 2023, with a positive impact of 5.3%.
Looking ahead, management identified a Total Available market (“TAM”) of $20B with Non-residential Electronics & Software being the fastest growing segment.
Allegion International was effectively formed in 2021 by merging the EMEA and APAC regions.