Analyst Note
| Brian Bernard, CFA, CPA |In a surprising move, narrow-moat Fortune Brands announced on April 28 that it intends to spin off its $2.9 billion cabinets business in a tax-free transaction. Management expects the spinoff will occur in approximately 12 months. While we weren't expecting this announcement, a similar transaction is not without precedent in the industry. We say that because Masco sold its cabinets business in early 2020 for over $850 million, or approximately 9 times EBITDA. We applauded Masco's divestiture because while its cabinets business performed quite well at times, its return on invested capital was unimpressive, and we didn't think the business had an economic moat. We share that opinion for Fortune Brands' cabinets business. Fortune Brands' remaining business will have two segments: water innovations (formerly global plumbing group), which accounts for 58% of pro forma sales (with a 23% adjusted operating margin) and outdoors and security (42% of sales and a 15% adjusted operating margin). The closest public comparison for the stand-alone $2.9 billion cabinets business (12% adjusted operating margin) is American Woodmark.