Fortune's Spirits Rise

Shares of Fortune Brands (FO ) have vaulted from 68 in June to 82.77 on Dec. 13 despite concerns that a housing slump might crimp 2007 earnings. Also seen as a drag is its "consumer conglomerate" image. Some 57% of sales come from home and hardware, 30% from liquor and wine, and 13% from golf gear. Formerly American Brands, the company spun off its Gallaher Group (GLH ) tobacco unit in 1994 and changed its name to Fortune Brands. Now some pros say Fortune may split in two. Spirits, led by No. 1 bourbon Jim Beam, and golf, including Titleist golf balls and Footjoy golf shoes, will form one entity. Home and hardware, including Moen faucets, Therma-Tru fiberglass doors, and Master Lock, will be spun off to shareholders. A Fortune spokesman said the "breadth and balance of the company has delivered consistently strong results and shareholder value." But Mario Gabelli, whose firm owns 500,000 shares, says a split "is one way to unlock the value in the spirits operation." Gabelli figures the Street would give a pure spirits/wine entity a high price-earnings ratio equal to that of Constellation Brands (STZ ) or Brown-Forman (BFB ). Gabelli says $3 of Fortune's estimated 2007 earnings of $5.75 a share comes from its spirits unit. Liquor accounts for 34% of profits, while home generates 56%, and golf 15%. Gabelli puts Fortune's intrinsic value at 110. Gregory Gieber of A.G. Edwards, who rates Fortune "buy/aggressive," says spirits "has a lot of upside potential" whose value isn't yet reflected in the stock. Fortune acquired 25 brands from Allied Domecq (AED ). last year. Gieber has a 12-month stock price target of 93.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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