Allegion (ALLE)

Security hardware provider Allegion (NYSE:ALLE) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 10.7% year on year to $1.07 billion. Its non-GAAP profit of $2.30 per share was 2.5% above analysts’ consensus estimates.

Company Overview

Allegion plc (NYSE:ALLE) is a provider of security products and solutions that keep people and assets safe and secure in various environments.

Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.

Competitors in the security solutions industry include ASSA ABLOY (OTC:ASAZY), Fortune Brands (NYSE:FBHS), and Stanley Black & Decker (NYSE:SWK)

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Allegion’s 8% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. 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. We also note many other Electrical Systems businesses have faced declining sales because of cyclical headwinds. While Allegion grew slower than we’d like, it did do better than its peers.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Allegion’s organic revenue averaged 3% year-on-year growth. Because this number is lower than its two-year revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Allegion reported year-on-year revenue growth of 10.7%, and its $1.07 billion of revenue exceeded Wall Street’s estimates by 2.5%.

Looking ahead, sell-side analysts expect revenue to grow 5.5% over the next 12 months, similar to its two-year rate. This projection is underwhelming and indicates its newer products and services will not lead to better top-line performance yet.

Allegion has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 43.2% gross margin over the last five years. That means Allegion only paid its suppliers $56.85 for every $100 in revenue.

Allegion produced a 45.8% gross profit margin in Q3, marking a 1.1 percentage point increase from 44.7% in the same quarter last year. Allegion’s full-year margin has also been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Allegion has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 19.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Allegion’s operating margin rose by 2.5 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Allegion generated an operating margin profit margin of 21.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Allegion’s EPS grew at a solid 10.4% compounded annual growth rate over the last five years, higher than its 8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Allegion’s earnings can give us a better understanding of its performance. As we mentioned earlier, Allegion’s operating margin was flat this quarter but expanded by 2.5 percentage points over the last five years. On top of that, its share count shrank by 6.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Allegion, its two-year annual EPS growth of 8.2% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q3, Allegion reported adjusted EPS of $2.30, up from $2.16 in the same quarter last year. This print beat analysts’ estimates by 2.5%. Over the next 12 months, Wall Street expects Allegion’s full-year EPS of $8.06 to grow 2.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Allegion has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 15.1% over the last five years.

Allegion’s free cash flow clocked in at $209.8 million in Q3, equivalent to a 19.6% margin. The company’s cash profitability regressed as it was 2.3 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Allegion hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 23%, splendid for an industrials business.

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 3.5 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.

Allegion reported $302.7 million of cash and $2.09 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $983.8 million of EBITDA over the last 12 months, we view Allegion’s 1.8× net-debt-to-EBITDA ratio as safe. We also see its $36.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Allegion beat analysts’ revenue expectations this quarter. We were also glad its organic revenue outperformed Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 1.4% to $178 immediately following the results.

Updated: December 4, 2025 at 10:42 PM EST

Are you wondering whether to buy Allegion or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Allegion has some positive attributes, but it isn’t one of our picks. First off, its revenue growth was decent over the last five years, and analysts believe it can continue growing at these levels. And while Allegion’s diminishing returns show management's prior bets haven't worked out, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Allegion’s P/E ratio based on the next 12 months is 18.9x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $183.09 on the company (compared to the current share price of $160.84).