The steep rise of Soros Fund Management’s position in security products manufacturer Allegion from 5, 000 shares at the end of 2013 to over 1.6 million by the end of September 2014 raises the questions of what attracted the legendary investor’s fund to the company and whether retail investors should follow its lead, The Motley Fool said.
The Allegion position has two themes in common with another mid-cap stock the fund has been buying, electrical products and lighting company Hubbell. It’s hard not to think that this is part of a thematic view at Soros Fund Management, the report said.
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First, both companies are heavily exposed to the North American construction market, particularly commercial construction. Second, both companies have the opportunity to generate long-term growth through the delivery of value-added solutions as a result of technological change, the website said.
A quick look at Allegion’s revenue and profit mix demonstrates its end-market exposure. According to a recent investor presentation, Allegion derives 62% of its revenue from the U.S., with the No. 2 revenue provider (Western Europe) a distant second at 17%, according to the report.
Roughly 70% of its global sales go to the commercial construction sector (the remaining 30% is residential), with global revenue evenly split: 49% from new construction and 51% aftermarket. Moreover, for the first nine months of 2014, Allegion generated $320.1 million in segmental operating income from the Americas (which includes the all-important U.S. sales), with the EMEIA (Europe, Middle East, India and Africa) and Asia-Pacific regions losing $4.3 million and $7 million, respectively, the website said.
In other words, Allegion is a play on a recovery on the North American construction markets. The good news is that the most widely followed indicator of future growth in North American construction, the Architecture Billings Index, indicates that conditions are set to improve, the report said.
Allegion is also coming up to the 10-year anniversary of the start of the construction boom in 2005, which means facilities are likely to begin upgrading their security doors and locks. It’s not unusual for companies to depreciate plant and machinery at a rate of 10% a year, so on this basis, Allegion should see a pickup in end demand in the aftermarket, the website said.
Furthermore, Allegion has an opportunity to sell extra value-added solutions that include wireless and Web-enabled technologies.
Moreover, during the company’s last earnings call, CEO David Petratis argued that the new locks would not replace its existing sales: “We don’t expect a lot of cannibalization … we’re opening up new markets.”
As attractive as Allegion might look as an investment, it’s hard to see the stock as good value right now. A look at its forward enterprise value-to-EBITDA ratio suggests the company isn’t cheap compared to Hubbell or Stanley Black & Decker. Those two companies are not perfect examples of competitors, but they are exposed to similar end markets, the website said.
All told, Allegion is a stock to watch, but cautious investors might want to wait for a better entry point before following Soros Fund Management into this company, the report said.
Meanwhile, Soros was listed as one of the 10 surprises that were considered but didn’t make the top 15 potential analyst surprises for 2015, according to Goldseek.com. It predicted that Soros would make $2.5 billion by shorting German Bunds.