Home fixtures maker American Standard (NYSE:ASD) got some long-awaited respect in the marketplace this week as investors rewarded its 2004 earnings report with a 6.6% increase in market cap.
Operationally, there was much to like about Tuesday's report. For both the fourth quarter and the year, American Standard grew its revenues by 11%. Net earnings per diluted share actually declined to $1.42, down 23% year on year. But the reason for the decline was that the company made a strategic decision to take a charge to earnings in order to put all of its asbestos-related liability behind it once and for all. Absent that one-time charge (and a couple of other one-time items), profits would have grown at twice the rate of revenue growth and come in at $2.24 per diluted share.
Another way to look at the company's progress is to examine American Standard's free cash flow generation for the year. From that perspective, the company's performance looks considerably worse than it did under the pro forma numbers it proffered (the 22% annual earnings growth) -- but considerably better than under GAAP (the 23% decline in profits). The free cash flow story, in contrast, lies somewhere in between, with last year's $480.5 million in free cash flow growing by 5% to achieve the company's best free cash flow year ever: $504.5 million in total.
Like I said, there's little to quibble with over the company's operational performance. Where this Fool takes issue with American Standard is with its apparent shift in focus away from managing its business, toward managing its stock price. Take the asbestos charge that so thrilled the market. Previously, American Standard had been taking charges as asbestos claims were filed or decided against it. It was a death by a million cuts, each one striking at the company's stock price.
But make no mistake: In taking a single charge for "estimated payments to pending and future claimants over the next 50 years," American Standard is only applying a cosmetic bandage to those cuts. If future claims actually exceed Tuesday's $188 million "one-time" charge, additional charges will still need to be taken. American Standard is just betting that won't happen, that it can put the bad news behind it today and never be bothered with those charges again. That's good for the stock price but affects operations not a whit.
Similarly with the company's stock buyback plan. If a company wants to truly reward its shareholders, it buys back stock when it's cheap. American Standard's stock price, however, is at an all-time high.
True, the market hadn't been appreciating American Standard's intrinsic value as a business before Tuesday's "good" news. The market was wrong then. But by buying in to Wall Street's mistake, I'm afraid its American Standard that's in the wrong now.
Up until today, Fool contributor Rich Smith was one of American Standard's few investing fans. Read why in:
- American Standard's Slow Drain
- American Standard Finds Strength
- American Standard's Cash Flows
- American Standard Still Clogged
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.
