Well, Spring has finally arrived.
And while it's said that during this time a young man's fancy may turn to love, everyone else's definitely turns to yard care.
Getting Back into Lawn Care
With that sentiment in mind, now is as good a time as any to consider the companies that power our lawnmowers, weed whackers, edgers, and leaf blowers.
Principal players in the powered lawn care business include Toro (NYSE: TTC), Black & Decker (NYSE: BDK), Deere (NYSE: DE), and even mighty Honda (NYSE: HMC).
All are formidable players, to be sure, but I'm most interested in the biggest player, Briggs & Stratton (NYSE: BGG), the world's largest producer of air-cooled gasoline engines for outdoor lawn and garden equipment.
Bigger Does Not Mean Better
Besides being the biggest player in the business, Briggs might also be the most sputtering, puttering, and backfiring player.
For the second quarter fiscal-year 2007, the company posted net sales of $423.1 million and a consolidated net loss of $5.9 million or $0.12 per share. Compare that to the second quarter of fiscal year 2006 when it posted net sales of $574.3 million and net income of $21.8 million or $0.42 per share.
According to Briggs officials, the net loss and 26% decline in sales were due to two factors, which I'll quote verbatim -- "Unit shipments were lower due to reduced generator sales as compared to the prior year when landed hurricanes had contributed to higher demand. Also, we experienced a delay in shipments to lawn and garden engine customers who have chosen to assemble product closer to the selling season."
Lower guidance doesn't help either. Briggs recently said it expects to earn $86 million to $96 million, or $1.72 to $1.92 per share, in the second half of fiscal year 2007. Wall Street was expecting the company to earn $1.95 per share.
This blitzkrieg of bad news has helped shave 21% off the company's share price, which is currently at $31 and change.
Down, But Not Out
But that's okay with me. Granted, I'm no fan of excuses (I'm more into mea culpas). But I'm definitely into problems, because problems present opportunity.
Quarterly results aside, Briggs is a viable company, with a more than decent balance sheet: Debt to equity is a very serviceable 26% while the current ratio is a very stout three-times coverage. Liquidity is more than sufficient to fund the $0.88 per share dividend.
Just as importantly, Briggs & Stratton is a venerable brand name. Look in your shed or garage; chances are the weed whacker, lawnmower, or edger are powered by one of the company's little engines. Better yet, go to a Sears (SHLD), Wal-Mart (WMT), Home Depot (HD) or Lowe's (LOW) and chances are even greater that you'll find the Briggs & Stratton moniker prominently displayed (which is a good thing, considering 80% of all lawn and equipment sold in the U.S. is sold through the aforementioned quartet).
Looking at the near-term, Briggs' sales will likely be hurt by excess inventory and a lack of landed-hurricane activity during the latter half of 2006. Looking further ahead, continued strength in the U.S. economy, combined with a projected increase in international demand, most notably in Europe, should help lift aggregate demand in the second half 2007. (And I don't wish anyone any ill-will, but the fact is that 2006 was a very mild hurricane season in the U.S.)
As for valuation, my quick-and-dirty discounted cash flow model produces an intrinsic value of around $42 a share. My assumptions include a 10% discount rate and $2.70 a share in operating cash flow for fiscal year 2007, which I conservatively expect to grow at 2% (slightly above the inflation rate and well-below the 10-year annual average of 6%) for the next five years. After that, I assume a 4% growth rate into perpetuity.
My enthusiasm for Briggs is somewhat tempered by the prospect of a weakening U.S. economy and a rich 21 forward P/E ratio. Still, I think the longer-term risk/reward matrix is favorable, and that the company is at least deserving of a look.
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