Allegion (ALLE)

Security hardware provider Allegion (NYSE:ALLE) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 5.4% year on year to $941.9 million. Its non-GAAP profit of $1.86 per share was 11.2% 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)

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Allegion’s 5.9% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector and is a rough starting point for our analysis.

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 annualized revenue growth of 4.9% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

Allegion also reports 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 2.5% year-on-year growth. Because this number is lower than its normal 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 5.4%, and its $941.9 million of revenue exceeded Wall Street’s estimates by 2%.

Looking ahead, sell-side analysts expect revenue to grow 2.1% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

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 42.8% gross margin over the last five years. That means Allegion only paid its suppliers $57.19 for every $100 in revenue.

Allegion produced a 44.9% gross profit margin in Q1, marking a 1.1 percentage point increase from 43.8% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

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 19.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Allegion’s operating margin rose by 2.6 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Allegion generated an operating profit margin of 20.9%, up 1.6 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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 decent 9.2% compounded annual growth rate over the last five years, higher than its 5.9% 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 expanded by 2.6 percentage points over the last five years. On top of that, its share count shrank by 7.1%. 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 shorter period to see if we are missing a change in the business.

For Allegion, its two-year annual EPS growth of 10.4% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Allegion reported EPS at $1.86, up from $1.55 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Allegion’s full-year EPS of $7.84 to stay about the same.

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 14.8% over the last five years.

Taking a step back, we can see that Allegion’s margin dropped by 2.5 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Allegion’s free cash flow clocked in at $83.4 million in Q1, equivalent to a 8.9% margin. This result was good as its margin was 6.2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

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 23.2%, 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 3.7 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.

Allegion reported $494.5 million of cash and $2.00 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 $943.6 million of EBITDA over the last 12 months, we view Allegion’s 1.6× net-debt-to-EBITDA ratio as safe. We also see its $37.5 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 and EPS expectations this quarter. Looking ahead, full-year EPS guidance was maintained. This can sometimes cause some pessimism, as the market wonders why the 'beat' wasn't flowed through to guidance Said differently, a comfortable EPS beat in the quarter should mean raising full-year guidance because lack of a raise implies a lowering of the rest of the year's outlook. The stock traded down 2% to $124 immediately after reporting.

Updated: July 10, 2025 at 12:02 AM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Allegion.

Allegion isn’t a terrible business, but it isn’t one of our picks. For starters, its revenue growth was uninspiring over the last five years, and analysts don’t see anything changing over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its projected EPS for the next year is lacking. On top of that, its diminishing returns show management's prior bets haven't worked out.

Allegion’s P/E ratio based on the next 12 months is 19.1x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $149.85 on the company (compared to the current share price of $150.06).