Over the last six months, Allegion’s shares have sunk to $146.69, producing a disappointing 16.2% loss - a stark contrast to the S&P 500’s 3% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Allegion, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Allegion Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Allegion. 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 3.1% 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. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Allegion’s revenue to rise by 6.2%, close to its 8.4% annualized growth for the past five years. This projection doesn't excite us and suggests its newer products and services will not accelerate its top-line performance yet.
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 4 percentage point decreases each year 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 isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 16.8× forward P/E (or $146.69 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward the most dominant software business in the world.
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