However, the company offered a conservative outlook for 2010 and said that it expects EPS of $2.30 to $2.80 per share, which is below the Zacks Consensus Estimate of $2.89 per share derived from 12 covering analysts. Fortune Brands also stated that earnings for the first quarter of 2010 is expected to be lower compared to the year-ago period due to higher brand investment in the Spirits business and incremental costs associated with restructuring efforts.

The Zacks Consensus Estimate on the company’s earnings for the first quarter is currently pegged at 46 cents per share, which reduced by 7 cents over the past month as 1 of 6 covering analysts lowered expectations.

Meanwhile, net sales for the fourth quarter of 2009 grew slightly to $1.80 billion from $1.79 billion in the year-ago quarter, primarily due to growth in Spirits and Golf businesses. However, the top-line increase was partially offset by revenues declines in Fortune Brands’ Home Products business.

Home Products declined 3.3% to $823.8 million as Fortune Brands continued to face the adverse impact of conservative spending by consumers on big-ticket discretionary items. However, the company witnessed improved results in Moen and Simonton brands, which helped moderate the sales decline in this segment.

Fortune Brands’ Spirits division recorded a growth of 3.5% year-over-year to $746.4 million, mainly driven by improved performance by Jim Beam and Maker’s Mark brands in the U.S, which more than offset sluggishness in certain international markets. Moreover, the segment’s sales also benefitted from favorable foreign currency translations.

The Golf segment rose by 6.9% to $226.9 million as Fortune Brands outperformed the industry with double-digit sales increases for Titleist golf balls and FootJoy shoes coupled with solid performance in Asian markets.

At the end of the quarter, Fortune Brands had cash and cash equivalents of $417.2 million and long-term debt of $4.4 billion, compared to $163.3 million of cash and $4.7 billion of long-term debt in the year-ago period. During 2009, the company generated free cash flow of $724.7 million, compared to $691.5 million in the year-ago period. For 2010, Fortune Brands expects free cash flow to range between $375 million and $475 million.

The company expects first-quarter earnings of 30 cents per share, excluding items, which is higher than the lowered consensus estimate of 17 cents.

However, the company also reduced its annual dividend to 76 cents per share, compared to $1.76 earlier. The initiative will enable the company retain an additional $110 million over the remainder of 2009 and $150 million on an annualized basis.

Analysts on average have reduced full-year earnings estimates, pulling the consensus lower by 4 cents over the past 60 days to $2.23 per share.

FO, a Zacks #4 Rank ("Sell") stock, is trading on higher than-usual-volume of 3 million, compared to average volume of about 2.7 million.

• Axis Capital Holdings Ltd (AXS)
• Caterpillar Inc (CAT)
• CBL & Associates Properties Inc (CBL)
• Enterprise GP Holdings LP (EPE)
• Equinix Inc (EQIX)
• Exterran Holdings Inc (EXH)
• Fortune Brands Inc (FO)
• GATX Corp (GMT)
• Genuine Parts Co (GPC)
• Ingram Micro Inc (IM)
• Interline Brands Inc (IBI)
• KB Financial Group Inc (KB)
• Kyocera Corp (KYO)
• Lincoln National Corp (LNC)
• Porter Bancorp Inc (PBIB)
• Sunstone Hotel Investors Inc (SHO)
• Textainer Group Holdings Ltd (TGH)
• Time Warner Inc (TWX)
• Turkcell Iletisim Hizmetleri AS (TKC)

Waiting for the recovery does not mean sitting on your hands and doing nothing. There are things that you can be doing today to help yourself prosper for the long run. Indeed, now may be the best time in your life to make moves that will help you have greater wealth later in life.

The stock market almost always turns up before the economy does. Trying to pick the absolute bottom is a fool's game. We are far enough along in the process that it is time to start tiptoeing back into the market.

Remember that a bear market is a long term investor's best friend. Only in bear markets do serious values appear.

Why the Recovery Will be Slow

The timing and shape of the eventual recovery will play a very important role in the success of your portfolio. In trying to figure out how and when the recession will end, it is useful to look at how other recessions have come to an end.

In every recession, the part of the economy that gets moving first is residential investment, which is mostly the construction of new houses. Existing home sales, which make up about 7 of every 8 home transactions, also tend to start rising at the same time. (Existing home sales, however, are pretty much irrelevant to GDP growth since no construction is taking place.)

The graph below shows that both new and existing home sales tend to bottom in recessions and then rise sharply, helping to drive the economy out of the recession. The dramatic decline in both was the biggest clue that a recession was coming.

The next thing to get going is consumer spending, particularly on big ticket stuff that people do not buy every day. The classic example of this is auto sales.

Business investment tends to lag behind and, at best, moves with the overall economy (e.g. software and equipment investment) or after the rebound has firmly started (e.g. investment in new office buildings and stores).

The unemployment rate lags economic cycles and tends to rise even after a recovery gets underway. Still, employment will normally start to improve faster than investment in non-residential structures. Non-residential construction has just started to turn down, and has much further to fall.

Home Prices, Not Starts, Are Key

So, with February's shocking news that new home starts jumped by 22.2% over January; does it mean that happy times are here again? Sadly no, and I actually consider this to be extremely bad news.

At the January sales pace (the February data will be released on Wednesday), it would take 13.3 months to clear the existing inventory of new houses. Never before in history has the months of supply of new houses even exceeded a year.

So while in the short term, the rise in starts is good news for the homebuilders like D.R. Horton, Inc. (DHI) and Lennar Corporation (LEN), over the longer term it is bad news. Do not pay attention to the recent speculation into these companies, or in the major suppliers to them, like Masco Corporation (MAS) or Fortune Brands, Inc. (FO).

Put another way, we have to remember the first law of holes. If you find yourself in one, stop digging. In this case literally, we need to stop digging new foundations.

Now perhaps it is not quite as bad as the numbers look at first blush. Housing starts are a notoriously inexact statistic. However, in the absence of better information we have to assume the up 22.2% number is correct. Also, most of the new construction being started is for apartments and condos. Single family starts were only up 1.1%, while starts in structures with 5 or more units were up 79.7%.

These new apartments and condos will be competing with the existing stock of new houses for sale, and with existing homes, and increasing number of which are distressed sales, in or near foreclosure. Housing prices fell by 18.5% in 2008, as measured by the 20-metro area Case-Schiller Index. This plunge was a major factor in the $11 trillion loss of wealth in the country in just the fourth quarter.

On the other hand, is it a good time to be buying a house? Not really, based on long standing relationships between the price of a median house and median incomes. Furthermore, based on the historical relationship between what it would cost to rent or buy a comparable house, nationwide housing prices still probably have another 15% or so downside to them. A flood of new apartments coming on line will only further depress the natural equilibrium price for housing.

Consumers Not Eying Big Purchases

That loss of wealth is going to make people try to save more out of their current paychecks. Saving more can be tough when one or both spouses have lost their job, but many consumers don't have a choice. The retirement plans of all but the wealthiest baby boomers have just been severely disrupted. The 401K has become a 201K, and the equity they once had in their houses is gone. While the assets might be gone, the debt lingers on.

The last thing a worried consumer is going do is go out and take on $25,000 of more debt to buy a new car. Rather he will keep the old one running for a few more years.

Keep in mind that the quality of new cars, both U.S. brands like General Motors (GM) and Ford Motor (F) and foreign nameplates like Toyota (TM) and Honda (HMC) has improved dramatically since the last recession we had of this magnitude, back in the early 1980s.

Yes, the current sales rate of under 10 million light vehicles is probably unsustainable over the long term, but that does not mean that we will have a strong rebound in sales soon.

The only thing that the economy really has going for it right now is the economic stimulus package. This will keep the incomes of those hardest hit by this downturn somewhat intact so they can continue to spend on necessities. Most people will get a small tax cut, and they might even spend some of that.

The package should help to prevent state and local governments from dramatically cutting back services or raising taxes to balance their budgets. It will spur the overhaul of our long neglected infrastructure. We will start to improve our energy efficiency and produce renewable power sources. This will keep the economy alive, but on life support.

From a low base, it is likely that the GDP will start to grow again towards the end of this year and into 2010, but the pace of that growth will be extremely anemic. Unemployment will continue to rise even as the economy starts to grow.

The low interest rates and loose monetary policy being pursued by the Federal Reserve will last help in this life support mission.

Eventually people will feel they have saved up enough, and their old goods are in such dire states of disrepair, that they start to spend again. But we still have a ways to go before enough demand gets pent up that we can get the economy going full bore. Time heals all wounds, even deep economic ones.

What to Do Now

I would suggest dollar cost averaging in over a period of about 6 months. So if you have $30,000 you want to invest, put $5,000 of it to work each month. This is far more advantageous than trying to pick an exact bottom, which is impossible.

Stick with only those firms with strong balance sheets and which make products for which there is a steady demand. As a shareholder, you are part owner of all the assets of the firm. A firm with lots of cash will be able to take advantage of the bad economy. Its weaker competitors will be forced out of business or greatly weakened. The stronger companies will be able to scoop up the bargains that become available and gain market share.

Key Sectors

The first sector I would be looking at would be health care, closely followed by consumer staples. Think of companies like Johnson & Johnson (JNJ), St. Jude Medical, Inc. (STJ) and Colgate-Palmolive Company (CL). The economy would have to be in very desperate straits for people to stop buying band-aids, decide not to get a needed heart valve replacement or stop buying toothpaste.

There are also some interesting investments available in the electric utilities. Zacks Equity Research currently has buy recommendations on Allegheny Energy, Inc. (AYE) and Sempra Energy (SRE).

I would continue to avoid the financial and consumer discretionary sectors. I fear that there are many more write-offs to come in the financial sector, particularly as commercial real estate starts to decline.

If you are determined to play the financials, I would advise buying the bonds of banks, not the common stock. The common stock is likely to get diluted, but it is clear that the government is not going to let major banks go bankrupt, which makes the bonds very safe investments. Plus the current worries have their bonds trading with high yields.

The consumer discretionary sector is filled with companies where consumers can easily go on strike for a while. Given the need to rebuild savings, they could be staying away in droves for a long time.

Understand that the longer your time horizon, the more likely it is that your investments will pay off. The time to buy stocks is when they are on sale, even if they get marked down further in the short-term. We may not be out the woods, but we will emerge out the current crisis in better shape.

Best of Luck,
Dirk van Dijk, CFA
Director of Research,
Zacks Equity Research

Dirk heads a staff of analysts that provide continuous coverage for a universe of 1,150 companies. These analysts issue long-term recommendations and target prices.

During the past 6 years, while S&P 500 stocks went downward, Zacks Equity Research recommendations compounded a +234% gain.