It happens all too often: A healthy company is reliably growing around 10%-15% per year. Its shares are priced at 25 times earnings or more. The company releases a strong earnings report but should have scaled back its growth assumptions by a few percentage points. Investors are disappointed, and the stock gets hammered.
On Oct. 18, American Standard
How serious is American Standard's guidance cut? Let's analyze its free cash flow numbers to find out. For full-year 2005, the company had initially projected $550 million in free cash flow but now projects only $520 million. The updated guidance amounts to a 3% improvement over 2004, instead of the initial 9% estimate. Based on the updated free cash flow guidance, American Standard now trades at an enterprise value-to-free cash flow ratio of approximately 17.35, which is a reasonable price.
The culprit for the shortfall is the company's bath and kitchen business, which saw sales decline 2% and segment income drop by 62% year over year in the third quarter (excluding foreign currency effects). Unfortunately, the results aren't expected to improve much in the fourth quarter, though American Standard does believe that some of its restructuring and repositioning efforts, including its new water-saving toilets, will pay off.
Its air-conditioning systems and services business continues to perform well. This business segment, similar to United Technologies'
With ample free cash flow and a 1.4% dividend yield, American Standard's battered stock price is starting to look intriguing. Folks may be negative on the bath and kitchen business, but I think it's a solid long-term opportunity for the company. We're hardly going to stop using bath tubs, sinks, and toilets any time soon.
Furthermore -- and I realize this is a strange thing to say -- the toilets in most American homes are downright inferior to what you'll find in the average Japanese home. We're an advanced society, concerned about cleanliness, but Americans haven't embraced toilet advances common in Japan, like heated toilet seats, a built-in bidet, or automated toilet seat covers. There's an outside chance that Americans could seek to catch up with our Japanese friends in the bathroom. That sort of upgrade market would spell good news for American Standard going forward .
For more Foolish toilet humor:
- American Standard vs. the Street's Standard
- Stalwart American Standard
- Lowered Standard
- American Standard's Slow Drain
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