Allegion (ALLE): Buy, Sell, or Hold Post Q3 Earnings?

Allegion’s 19.2% return over the past six months has outpaced the S&P 500 by 5.3%, and its stock price has climbed to $165.31 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Allegion, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is Allegion Not Exciting?

We’re happy investors have made money, but we're cautious about Allegion. Here are three reasons why ALLE doesn't excite us and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Allegion’s recent performance shows its demand has slowed as its annualized revenue growth of 4.9% over the last two years was below its five-year trend.

2. Slow Organic Growth Suggests Waning Demand In Core Business

In addition to reported revenue, organic revenue is a useful data point for analyzing Electrical Systems companies. This metric gives visibility into Allegion’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Allegion’s organic revenue averaged 3% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Allegion’s ROIC averaged 3.7 percentage point decreases over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Allegion’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 18.5× forward P/E (or $165.31 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.