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Value Line has initiated coverage of Allegion plc (ALLE) in its flagship product, The Value Line Investment Survey. The company specializes in security products and solutions for the doorway and beyond. Its portfolio includes an array of mechanical and electronic security products from a range of brands, which are offered in commercial, institutional, and residential applications. The company employs over 8,000 individuals.

Allegion was spun off from Ingersoll-Rand (IR) and has replaced JC Penny (JCP) in the S&P 500 Index. The purpose of the spinoff was to allow Allegion management to focus more keenly on its core brands. Though the company’s name is new, many of its brands were established over 75 years ago. On December 1, 2013, it became a standalone company. The next day, it began trading on the New York Stock Exchange. Allegion issued approximately 96 million shares in the spinoff, and is incorporated in Ireland.

The company’s principal products include door closers and controls, doors and door frames, electronic security products, exit devices, workforce productivity systems, electronic access controls, lock and key systems, and video analytics. Most often, these products can be tailored to meet the end user’s specifications.

Primary growth initiatives include investing in electronic-related products, expanding in emerging markets, and pursuing acquisitions. Sales in electronic product categories are growing at a rather fast pace relative to traditional mechanical security products. This will likely continue to be the case going forward because more and more end users are apt to adopt more advanced technologies in their facilities. Emerging markets represent decent opportunities in regions where living standards and more sophisticated security requirements are rising. In regards to acquisitions, we think Allegion may target some smaller entities in the industry to expand its global footprint and broaden its portfolio.

The emerging technology-security segments are highly fragmented. Many smaller players should flourish due to their ability to specifically focus on the adherence to local regulatory requirements (which can vary widely), and specialized, niche end markets. Some of these companies may be on Allegion’s radar already, since acquiring such companies could be a speedy way to gain expertise and scale in important new avenues.

It is probable that the industry is on the brink of a cyclical recovery. Over the last three years, the compound annual growth rate for security products in North America and Europe was just 1%-2%. Emerging markets have been more rewarding over the same span, growing over 5%. As growth returns to domestic residential and construction markets, strong demand should support good demand for Allegion products. The largest reporting segment by revenue is the Americas (73% of ’13 sales), followed by EMEIA (20%), and Asia/Pacific (7%).

Allegion is highly leveraged, currently. It assumed $1.3 billion of indebtedness in conjunction with the spinoff, which was distributed to Ingersoll Rand. Since the balance sheet holds such a large amount of debt, the company is subjected to elevated risk. It is generating healthy amounts of free cash flow, though, and we think that should be sufficient to start paying down debt levels. In the meantime, if it were to suffer from any unexpected operational inefficiencies or constrained demand, its need to service interest and principal payments could severely hurt its bottom line.

A quarterly dividend has been established. The payout is not likely to trigger much interest from income-seeking accounts, however, since its annualized yield represents less-than 1% return. Also, the board has approved a $200 million share-repurchase program. Even so, the company may not utilize that allotment for buybacks, and we think capital may be better used to reduce debt for the time being.

All told, subscribers interested in Allegion plc are advised to consult Value Line’s quarterly reports, as well as any supplemental reports and relevant articles as important news items arise.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.