Small-engine manufacturer Briggs & Stratton (NYSE:BGG) just reported earnings in line with analysts' expectations. Is the company firing on all cylinders, waiting to rev up in a recovery, or just sputtering along?
Company background
Briggs & Stratton reports in two operating segments: Engines and Power Products. Power Products manufactures equipment such as portable generators, pressure washers, and lawn-care equipment. The Engines segment manufactures engines for original equipment manufacturers (OEMs) and the Power Products segment. Revenue for fiscal year 2009 was split roughly 60/40 between Engines and Power Products.
Eighty-one percent of 2009 engine sales were to OEMs in the lawn and garden industry. The top three customers -- Husqvarna, MTD Products Inc., and Deere (NYSE:DE) -- accounted for 41% of engine sales.
Power Products distributes its products through retail channels such as Lowe's (NYSE:LOW), Home Depot (NYSE:HD), and Sears Holdings (NASDAQ:SHLD), with the top three customers accounting for 35% of 2009 Power Products sales.
Recent performance
Briggs & Stratton's second-quarter 2010 earnings were $0.06 per share, exactly in line with expectations. Earnings were even with the same quarter last year despite a revenue decrease of $84.5 billion. Like many companies, Briggs & Stratton is cutting costs to maintain earnings, which should set it up to do well if and when revenues pick up. Among the cost-cutting measures, the company closed a manufacturing facility, a move expected to save $11 million in FY 2011.
Valuation
It's difficult to pigeonhole Briggs & Stratton. At more than 33 times the past 12 months' earnings, it certainly doesn't trade in value territory. The dividend yield of 2.5% might look interesting, but a dividend cut last year and no dividend increases since 2005 aren't exactly what income investors are looking for.
The high dependence on lawn and garden care makes Briggs & Stratton a cyclical company. One way to attempt a valuation is to apply the margins achieved with today's cost-cutting measures to revenues from a recovering economy. Top-of-cycle earnings were estimated based on peak revenue achieved in 2005, when sales rolled in at $2.65 billion. Operating ratios were calculated based on the past four quarters' results and applied to the 2005 revenue figure to estimate possible earnings in a strong economy. The following values were assumed to be the same as for the past 12 months:
- Gross profit margin
- Selling, general, and administrative expenses
- Other income
- Interest expense
- Tax rate
- Number of shares
|
Briggs & Stratton |
Trailing 12 |
High Year Estimate |
|---|---|---|
|
Sales |
$1,874,213 |
$2,650,000 |
|
Operating Income |
$64,161 |
$208,643 |
|
Net Income |
$25,074 |
$138,524 |
|
EPS |
$0.51 |
$2.77 |
|
P/E Ratio |
33 |
6 |
All values in thousands except P/E ratio.
Trailing data by Capital IQ. High year estimate values calculated by author using assumptions noted above. SG&A expenses were reduced by $11 million based on projected savings from the plant closing.
Using the assumptions above results in an attractive valuation if and when sales recover to near peak values. Those assumptions are pretty rosy -- returning to peak sales and no increase in SG&A to do it.
Current valuations are rich and don't leave much of a safety margin in the stock price, and there is no telling when, or if, the company will achieve the high year estimates calculated above. Even if analyst estimates are correct and the company returns to the kind of sales numbers that would help justify today's share prices (with a forward P/E of 14), I still wouldn't call them cheap. Briggs & Stratton is an excellent candidate for investors' power equipment needs, but they should be able to find better investments for their portfolios.
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