ALLE - Allegion: Solid Company With Impressive Growth

2023-07-29 00:12:21 ET

Summary

• Allegion recently posted its Q2 FY23 results, with net revenues rising by 18% compared to Q2 FY22.
• The company's financial performance in Q2 FY23 was excellent, with improved operating income and net income, and a solid balance sheet.
• While ALLE is undervalued based on valuation ratios and solid financial performance, its technical chart shows weakness, leading to a hold rating.

Allegion ( ALLE ) manufactures electronic security products. They provide locks, locksets, workforce productivity systems, workforce management solutions, door controls, and exit devices. ALLE recently posted its Q2 FY23 results . I will analyze its Q2 FY23 result and technical chart in the report. I assign a hold rating on ALLE.

Financial Analysis

ALLE recently announced its Q2 FY23 results . The net revenues for Q2 FY23 were $912.5 million, a rise of 18% compared to Q2 FY22. I believe strong growth in the Americas segment and the successful integration of the Access Technologies acquisition were the main reason behind the revenue growth. The revenue from the Americas segment grew by 23.8% in Q2 FY23 compared to Q2 FY22. I believe the strong demand for electronic solutions was the major reason behind the revenue growth in the Americas segment. The electronics growth in America in Q2 FY23 was approximately 40% compared to Q2 FY22. Now talking about the Access Technologies that they acquired in 2022 contributed around 12% to their total growth. So I believe the successful integration of the Access Technologies acquisition played a major role in the revenue growth. Their operating income margin for Q2 FY23 was 20.2% which was 19% in Q2 FY22. I believe the improvement in operating margin was due to price realization and proficient operational execution.

Due to increased revenues and operating income, their net income also grew by 23.2% in Q2 FY23 compared to Q2 FY22. Now looking at its balance sheet, its cash & cash equivalents by the end of June 2023 were $322.6 million, which was $288 million in December 2022, which is a rise of 12%. Also, its long-term debt slightly declined in Q2 FY23. In addition, the company saw a rise in cash flows as a result of less cash being utilized for net working capital. So, in my opinion, the company's financial performance in Q2 FY23 was excellent, and not only their financials improved, but their balance sheet also improved and is looking solid, which is an optimistic sign, and the company has also raised its EPS guidance for FY23 and expects it to be around $6.10-$6.20 and its FY23 revenue guidance is around $3.6 billion which is around 12% higher than FY22 revenue. It shows that the company anticipates FY23 to be a solid year financially, which is a positive sign.

Technical Analysis

ALLE is trading at the $115.5 level. I like its financials and fundamentals, but I don't like its technical setup. There is a strong resistance zone for the stock at $115-$125, and recently after touching the $125 level, the stock has made a huge red candle which shows that selling pressure is present in the stock. Hence I would advise avoiding the stock for now because, in the past, whenever the stock price touched the resistance zone, it has fallen up to 15%. I think buying opportunities will only arise when the stock gives a strong weekly closing above the $125 level. If it crosses the $125 level, then I believe we might see a strong upward rally in the stock.

Should One Invest In ALLE?

First, talking about ALLE's valuation. ALLE has a P/E [FWD] ratio of 17.09x which is lower than the sector ratio of 17.77x and its five-year average ratio of 21.6x. ALLE has an EV / EBIT [FWD] ratio of 15.11x which is lower than the sector ratio of 15.68x. Both ratios and the historical average show that ALLE is undervalued. ALLE's recent financial performance was solid, and the future guidance provided by the management is also positive. Hence I believe ALLE is undervalued after looking at the valuation ratios and solid financial performance.

No matter how well a company performs financially or how strong its fundamentals are, if an investor's entry point into a particular company is not appropriate, he risks getting stuck there for a long time with no returns. This is why I think a company's technicals are just as important as its financials and fundamentals. Hence I believe the entry point should be correct, and ALLE is a perfect example of it. It has performed well financially and has solid fundamentals, but I don't like its technical chart. Hence despite liking its financials and fundamentals, I assign a hold rating on ALLE. I would personally wait for its technical setup to improve before making an investment decision.

Risk

Their access to capital markets, the cost of borrowing, or their future ability to secure favorable financing terms could all be negatively impacted by continued instability in the U.S. and international capital and credit markets, including market disruptions, limited liquidity, interest rate volatility, or reductions in the credit ratings assigned to them by independent rating agencies. For instance, companies might not be able to carry out possible merger and acquisition plans, make other investments, or fully execute their company goals and strategy if they can't access money and credit markets on agreeable terms. The capital and credit markets are also necessary for their suppliers and customers. Limitations on customers, suppliers, or financial counterparties' access to credit could result in the bankruptcy of important suppliers and customers, restrict or prevent customers from obtaining credit to finance purchases of their goods and services, postpone institutional, commercial, and/or residential construction and remodeling projects, and delay the delivery of important suppliers' products.

Bottom Line

ALLE is a strong company with solid financials and fundamentals. I believe it is undervalued, but I don't like its technical setup. Its technical chart is showing weakness, and the price might fall in the coming times. Hence I assign a hold rating on ALLE.

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