With oil back on the rise again, many manufacturers will continue hitting their customers with price increases to pass on the higher costs of doing business. On Thursday, I highlighted filtration operator CLARCOR
The engine manufacturer's stock blew a gasket; it declined by more than 10% in recent trading when its results and outlook fell below expectations. Briggs was originally anticipating $0.44 per share for the second quarter, while analysts were looking for $0.47. Instead, the company produced $0.42.
Briggs did see strength in the generator biz as a result of increased hurricane activity this year. What gains were achieved, however, were offset as customers moved to lower-priced power lawn and garden equipment. The same effect was seen in its engines segment as well. In the conference call, management highlighted the market's "move to smaller engines" as a significant reason behind the weaker forecast.
The company has a few options in dealing with higher energy and commodity costs. One is to create a hedge against aluminum and natural-gas costs. Management pointed to the locking in of lower-priced aluminum in quarters past as a hedge against the higher costs of the metal this year. This effect will expire going into fiscal 2007, however. At that time, Briggs will be back to paying the going rate of aluminum.
Another option available to Briggs is to increase the cost of its products in order to pass on some of the expenses to the consumer. Initially, management believed this strategy would lead to flat unit volume sales. Now the company is estimating unit volume to decline 1% to 2% compared with the same period a year ago. What's happening is that some of Briggs' competitors have decided not to pass on the costs through price increases, so customers are going for the lower cost options.
The net effect is that management is projecting $2.75 to $2.87 in earnings per share for 2006, which is well below analyst estimates of $3.21. Briggs & Stratton's stock is sputtering for good reason. As energy and commodity costs remain high, Briggs will continue to struggle until it can prove it has the pricing power to pass on these expenses to its customers.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.