Since November 2024, Allegion has been in a holding pattern, floating around $140.89.

Is there a buying opportunity in Allegion, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Allegion Not Exciting?

We're sitting this one out for now. Here are three reasons why ALLE doesn't excite us and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

We can better understand Electrical Systems companies by analyzing their organic revenue. 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 2.5% 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.Allegion Organic Revenue Growth

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Allegion’s margin dropped by 2.5 percentage points over the last five years. 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 margin for the trailing 12 months was 16.8%.Allegion Trailing 12-Month Free Cash Flow Margin

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Over the last few years, Allegion’s ROIC averaged 3.8 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.Allegion Trailing 12-Month Return On Invested Capital

Final Judgment

Allegion isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 18× forward P/E (or $140.89 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.

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Stocks We Would Buy Instead of Allegion

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