Rising Star Sells: Beam and Fortune Brands Home & Security

It's been less than a year since the Special Situations portfolio first purchased shares of the former Fortune Brands, a company that split into two units, Beam (NYS: BEAM) and Fortune Brands Home & Security (NYS: FBHS) . But now after substantial price appreciation, I think it's time to sell them from my Special Situations portfolio.

I first picked up Fortune Brands last July, buying a slug of 16 shares. When the price fell, I added another nine. In total, the Special Situations port bought $1,515.50 in shares. While that doesn't seem like a lot, it represented about 10% of my capital at the time.

Since then, the shares' total value has climbed to a pre-split price of $82, or $2,050 -- substantially more than my initial valuation estimate of about $75 combined. That's about $59 for Beam and $23 for Home & Security, and from the adjusted cost bases of each part, that equates to a nearly 20% gain for Beam and more than 100% for Home & Security. In total, it comes to a gain of 35% in less than a year.

The sell recs here come down to valuation. While I continue to like the economics of Beam's business, it just looks too pricey right now. And while I still think Beam has the chance to be acquired by a larger player such as Pernod Ricard or Diageo (NYS: DEO) , the price at this level is too high to continue waiting for that catalyst to appear. I estimate Beam is trading around 13.5 times my estimate of 2012 EBITDA, slightly below the 15 multiple of deals over the past decade. That 13.5 multiple translates into a forward P/E of 27. (My P/E estimate is a tad lower than the average analyst's guess of 25 for 2012.)

And on to Home & Security. It looks extra pricey (18 times EBITDA) when looking at trailing numbers, but this is a cyclical and should be valued on earnings over a longer period. When I originally valued this unit, I looked at the four years of profitability up to 2006 to gain some idea of its earnings power in a reasonable economy. In that period, the business averaged $715 million in EBITDA. At the company's current enterprise value of $4 billion or a multiple of 5.5 -- a standard market multiple -- that looks reasonably valued for a unit currently doing $235 million EBITDA (on an annualized basis).

I also cross-checked that valuation with a back-of-the-envelope valuation, assuming a value equal to assets. Home & Security's assets come to $3.65 billion -- right in line with the $3.69 billion market cap.

So the Special Situations portfolio will close up its positions in these stocks on the next market day.

If you think these companies still have room to run or are waiting for a pullback before you pick up some shares yourself, I encourage you to add them to My Watchlist, a totally free service offered by The Motley Fool that brings you the news and events that matter to you.

If you're looking for more great opportunities such as this, follow Jim onhis discussion boardand follow him on Twitter (@TMFRoyal).

At the time this article was published Jim Royal, Ph.D., owns no shares of any company mentioned.Motley Fool newsletter serviceshave recommended buying shares of Diageo and Beam. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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