Black & Decker (NYSE:BDK) reported its third-quarter earnings yesterday, and the market liked what it saw. The stock closed more than 4% higher. We'll see what the numbers tell us about this tool supplier.
For the quarter, net sales increased 2% to $1.6 billion. Operating income dropped almost 4% to $192.5 million. Net income from continuing operations on a dollar basis declined 9% to $125.1 million, but on a diluted per-share basis, they increased 3% to $1.74.
For the trailing nine months, sales barely moved, increasing 0.9% to $4.8 billion. Operating income increased 2% to $587 million. Net income from continuing operations on a dollar basis plunged 10% to $390.4 million, but slipped only 2% on a diluted per-share basis, coming in at $5.16.
The numbers show that wasn't an exciting quarter for Black & Decker, as the company struggled for growth. But as I said at the beginning, Wall Street was nothing short of infatuated with the stock, piling on as if in search of a short-term momentum fix. What gives?
Well, to begin with, the company's performance topped analysts' expectations, which is usually good for a short-term stock jump. In addition, the toolmaker, like many other companies these days, is reducing its share count via repurchases, and it plans to continue its buyback protocol. Earnings per share have the potential of rising, even if the earnings in dollar amounts decrease, because there are fewer stubs available.
Consider also that things are all right in terms of cash generation. The company saw its operating cash flow appreciate by just less than 50%, to $387.3 million, for the trailing nine months. Taking into account capital expenditures and disposal of assets, Black and Decker reported free cash flow equal to $320.2 million, good for an increase of more than 68%. For the rest of the year, the company expects to generate an amount of cash equal to its net earnings.
But even though Black and Decker's quarter beat expectations, I'd hesitate to buy its stock. The shares are trading closer to its 52-week high than its 52-week low. Also, the current dividend yield stands at about 1.8%, which isn't exactly astronomical. (Black & Decker does seem interested in raising dividends, however.) With yesterday's run-up, I'd be cautious about opening a position now, especially considering the company's tempered outlook and troubles with growing its top-line revenues.
Black & Decker is a fine toolmaker and an efficient cash flow manager. It's helping shareholders by reducing its stock float. Still, Black & Decker must compete with Stanley Works (NYSE:SWK), Makita (NASDAQ:MKTAY), and Danaher (NYSE:DHR) during a time of rising commodity costs and a softening housing marketplace. It's doing a decent job, but I'd rather see a significant drop in the share price -- and thus a higher dividend yield -- before I even consider buying.
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Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.
