Allegion (ALLE)

1.0 Business Overview

Allegion operates primarily through two geographic segments, with the Americas being the dominant profit driver. The business is characterized by a "blade and razor" model where the initial installation (mechanical hardware) leads to long-term replacement cycles and service opportunities.

Allegion Americas

The core of the business, generating the majority of revenue and operating income. It includes:

• Locks & Hardware: Schlage (residential/commercial) is a household name.
• Exit Devices: Von Duprin invented the "panic bar" exit device and remains the market leader.
• Door Closers: LCN provides heavy-duty closers often specified in schools and hospitals.
• Access Control: Electronic locks and readers (Schlage, aptiQ).

Allegion International

Covering Europe, the Middle East, Africa, and Asia-Pacific. Key brands include CISA (Italy), Interflex (workforce management), and Briton (UK). This segment is more fragmented but focuses on specific regional standards and electronic security solutions.

Strategic Shift: Electronics

Allegion is actively transitioning from purely mechanical products to "seamless access" solutions. This involves integrating electronics, mobile credentials, and software into their hardware, increasing the value per opening and creating potential for recurring software revenue.

2.0 Financial Performance

Margins & Efficiency

Allegion consistently delivers top-tier margins for an industrial company.

referenceGross Margin:      ~43%
Operating Margin:  ~21-22%
ROE:               ~30-35%

Key Driver: Pricing power derived from brand strength and the
mission-critical nature of security products allows Allegion
to offset inflation.

Cash Flow Allocation

The company generates strong free cash flow, which is deployed through a balanced capital allocation strategy:

• M&A: Bolt-on acquisitions (e.g., Stanley Access Technologies for $900M) to expand into automatic doors.
• Dividends: A reliable and growing dividend (Yield ~1.3%).
• Buybacks: Regular share repurchases to return excess capital.

3.0 Valuation

Allegion typically trades at a premium to the broader industrial sector, reflecting its higher quality, lower cyclicality (due to aftermarket exposure), and strong margins.

Valuation Metrics

4.0 Risks

Construction Cycles

While a significant portion of revenue comes from maintenance and repair (aftermarket), Allegion is still exposed to new construction cycles. A slowdown in commercial office or residential building starts can dampen growth.

Technological Disruption

The shift to smart locks brings new competitors from the tech sector (e.g., August, Ring). While Allegion partners with many of these players, there is a risk of hardware becoming commoditized while value shifts to the software layer.

Supply Chain & Inflation

As a manufacturer, Allegion is sensitive to the cost of raw materials (steel, brass, zinc) and electronic components. While they have historically passed these costs on to customers, rapid inflation can temporarily squeeze margins.

5.0 Related Pages