Wednesday, October 19, 2011

Ackman Thinks Housing Recovery Is In The Works - Forbes

Bill Ackman and Pershing Square Capital Management think the housing market will recover within the next five years – and they think Fortune Brands Home and Security is the investment to take advantage of that rebound. FBHS, a Fortune Brands spin-off that manufactures faucets, cabinets and security products, is poised to explode if the housing market chews through its excess inventory begins to recover.

“In order for this to be a good investment, it assumes a partial recovery in the housing market in the next 5 years,” says Ackman. “I think that’s a very conservative assumption.”

He’s not the only one. When Ali Namvar, a Senior Analyst at Ackman’s Pershing Square, presented a bullish case for FBHS at the Value Investing Congress today, he quoted Warren Buffett; “I don’t know exactly when [excess housing inventory] hits equilibrium but it isn’t 5 years from now,” said Buffett earlier this year. “I think it happens actually reasonably soon.”

Fortune Brands Home and Security, which spun off from Fortune Brands just two weeks ago (read about the spinoffs here) is poised to capitalize on a housing recovery. But it isn’t exposed to the downside risk of the sector, argue Namvar and Ackman.

“We like this one because it’s very low risk. We think if we’re wrong they’re still going to grow in a very slow housing market,” says Namvar. “It may not have the upside of some of the very-levered companies right now, but I like the safety of it.”

50% of FBHS’ business is in segments that are doing very well. Moen and MasterLock, two of FBHS’ strongest brands, are thriving in the plumbing and security sectors. The rest of company’s revenue comes from areas tied more to construction – things like cabinets, windows and doors. Despite providing 50% of revenues, though, the latter half only accounts for 20% of the company’s earnings before interest and taxes.

“This is where the explosion can happen if the housing market recovers,” says Namvar.