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.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!