Volume 75

Volume 75 | October 24, 2024

Welcome to Brief 75!

I thought it would be fitting to share a comparison of the earnings for Q3 2024 by ASSA ABLOY and Allegion, given what I believe is an honest view of the macro happening in our industry for the bulk of the legacy part of our industry - the high-security access control market. It's important to note that our industry has pockets that are seeing massive growth, but in the aggregate, they are still the outliers to the "mainstream" cottage side of our industry that we have been calling home for a long time. ASSA ABLOY and Allegion represent hardware first, high security, channel dependent, primarily commercial, and new construction market dynamics. Their growth or not relates to the growth you'd expect at most global legacy Physical Access Control Systems (PACs), distribution, and channels. I have confirmed this with many of the players in each of the types listed.

Before diving into it, I wanted to share a couple of updates:

I am fresh off my trip to the United Kingdom to keynote AMAG's SES24 conference. I am almost done with my write-up and will share it shortly, but to summarize my takeaways, it comes down to desire and execution. I will explain more soon in a Brief.

Next up for me is:

• Brivo's Cloud Security Summit in Austin, Texas (coverage)

• Executive Meeting at DMP in Missouri with an industry dinner in Kansas City (coverage)

• Stop in Chicago to meet with Liftmaster/Chamberlain (coverage)

• I'm back in NY for ISC East, where we're activating the Critical Infrastructure Pavilion in partnership with the show and helping host a VIP breakfast with CoreWillSoft. We will be doing a takeover of the ISC LinkedIn handle on 10/31.

• Another trip to New York for the Security Investor Conference by Imperial Capital (speaking and coverage)

• Then to Groenlo, NL (outside Amsterdam) to meet with the leadership team at NEDAP (coverage)

Also, keep an eye out for the following:

• Intersec Dubai and the Thought Leadership Pavilion

• ISC West in Las Vegas with the AI Zone and much more

• The Security Event in Birmingham, UK, with the XForum and the Night of Access industry night happy hour (RSVP now as we only have 100 spots for what will be a great night of fun and networking)

Hilary and I met this week and planned out 2025, and it looks great! If you're hosting your annual sales kickoffs or partner events, looking to do something different in a trade show booth, or would like me to visit your headquarters for a write-up and strategy session, please reach out.

As always, your feedback is invaluable to us. Please let me know if there's any area where we can better meet your expectations.

Now, let's get into the main topic of this Brief...

Thank you!

PS: I am sure some of you may forward this, but please do so sparingly and encourage others to sign up here. Thank you!

Q3 2024 ASSA ABLOY vs Allegion Earnings Analysis

I think Q3 2024 presents two strategic approaches in the access control market but represents where the bulk of the market is. Allegion shows good execution with 3.3% organic growth and great margins (24.2% adjusted operating margin), particularly in their Americas segment, which achieved a 28.3% operating margin. Their focus on operations and profitability is clear, and the fact that they raised full-year EPS guidance while maintaining revenue targets suggests strong confidence in their execution. However, their heavy dependence on the Americas market, price increases, and relatively modest international growth of 0.2% raises concentration risk concerns. Always has.

ASSA ABLOY, conversely, presents a more complex investment case with flat organic growth but an aggressive acquisition strategy, completing seven deals worth SEK 4 billion in annual sales. Their margin improvement to 16.7% (up from 15.7%) demonstrates good cost management and pricing power. Still, the reliance on acquisitions for growth, declining sales in Asia Pacific (down 6% organically), and weakness in Entrance Systems raise questions about underlying market momentum. The company's global diversification provides some room, but the significant global real estate market downturn and broader residential weakness across regions are headwinds.

The broader market dynamics revealed in both reports signal worrying trends for the industry for the balance of 2024 (with hope of a different result in 2025). Both companies face challenges in residential markets, which could worsen in a higher interest rate environment. While non-residential segments show resilience, particularly in the Americas, the divergence in organic growth rates between the two companies (3.3% vs. 0%) suggests market share shifts or different exposure to growth segments. ASSA ABLOY's heavier acquisition strategy versus Allegion's focus on organic growth and margin expansion makes investors choose between a more aggressive growth story with higher execution risk versus a more focused, profitable, but geographically concentrated business model. 

In the end, both companies are showing resilience in a challenging market, with Allegion demonstrating stronger organic growth, but ASSA ABLOY is making more aggressive moves in acquisitions and market expansion. I think their performance and results sum up the broader access control market in 2024…slow growth, savvy moves, and positive sentiment for 2025. We just need to get through 2024.

More details below.

Key Performance Metrics

Revenue Growth

• ASSA ABLOY:

  • Total revenue up 1% to SEK 37,418M

  • Organic growth 0%

  • Acquisitions contributed 4%

  • Currency impact -3%

• Allegion:

  • Total revenue up 5.4% to $967.1M

  • Organic growth 3.3%

  • Acquisitions contributed 1.9%

  • Currency impact is slightly positive

Americas

• ASSA ABLOY:

  • Strong organic growth at 4%

  • Good performance in non-residential

  • Stable residential market

  • Strong Latin America performance

• Allegion:

  • Americas revenue up 5.6% (4.1% organic)

  • Non-residential up mid-single digits

  • Residential business up low-single digits

  • Operating margin improved to 28.3% from 27.0%

Digital/Electronic Access

• ASSA ABLOY:

  • Global Technologies showed 2% organic growth

  • Strong growth in Global Solutions

  • Physical Access Control returned to growth

  • HID division showing positive momentum

• Allegion:

  • Electromechanical solutions continue to gain traction

Acquisitions

• ASSA ABLOY:

  • Completed 7 acquisitions with combined sales of SEK 4B

  • Notable acquisitions:

    • SKIDATA (access solutions for parking/mobility)

    • Level Lock (smart lock technology)

  • Focus on technological capabilities and market expansion

• Allegion:

  • Continued strategic acquisitions in doors and hardware

  • Building digital capabilities

  • Focusing on seamless access solutions but primarily a hardware business

Market Strategy

• ASSA ABLOY: Inorganic Growth

  • Heavy focus on acquisition integration

  • Emphasis on digital transformation

  • A strong push in service business development

• Allegion: Accounting and Finance

  • Emphasis on margin expansion

  • Focus on operational efficiency

  • Investment in innovation and digital solutions

Industry Implications

• Digital Transformation

  • Both companies are heavily investing in digital and electronic access solutions

  • Smart home technology is becoming increasingly important but still slow

  • Integration capabilities are a key focus

• Market Conditions

  • Non-residential sector showing strength

  • Residential market stabilizing

  • Service business growing in importance

• Geographic Trends

  • America shows the strongest performance

  • International markets are more challenging

  • Emerging markets showing mixed results

• Technology Investment

  • Increased focus on mobile access

  • Cloud-based solutions gaining traction

  • Integration of AI and advanced analytics

Forward-Looking Considerations

• Growth Drivers

  • Electronic access control adoption is accelerating

  • Service-based revenue models expanding

  • Integration with broader building management systems

• Challenges

  • Supply chain stabilization

  • Technology integration complexity

  • Market competition intensifying

• Opportunities

  • Digital transformation of traditional markets

  • Expansion of mobile access solutions

  • Growing security awareness driving adoption