Description

Briggs & Stratton (BGG $54.40)
SELL


Summary

BGG is a sale at its current price, as its shares do not reflect a looming downturn in its business. Demand for lawnmowers and lawn and garden equipment slowed dramatically at the end of the second quarter as retail sell-through was below plan. With excess inventory at retail and in OEM equipment manufacturers’ warehouses, OEM suppliers such as BGG will experience a decline in sales and orders. This should become more apparent in the company’s upcoming earnings release on Thursday, August 7th.

Valuation

Trading near its 52 week high of $55.17 (July 31)
Trading well above historical average multiples of 10.8X EPS and 6.7X EBITDA

Street Estimates: June 30 Fiscal

2003 2004

EPS $3.29 $3.45
P/E 16.53 15.77

Business Summary

76% of total 2002 sales are engines for lawn and garden equipment. 45% worldwide share.
76% of total company revenues are domestic and 24% are international.
Over 75% of all lawn and garden equipment is sold through mass merchandisers.

Market Environment

Large Competitor’s June Quarter Results

Worldwide Engine Market Comments:

Total volume remains very heavily weighted towards an unfavorable mix of low-margin, walk-behind rotary mower applications where average selling prices continue to deteriorate year-over-year.

Operating results were negatively impacted by increased engineering costs related to the development of new product offerings.

Margins were negatively impacted by increased costs for hourly healthcare, tooling, freight, and general overhead expenses.

North American Engine Market:

Unit shipments decreased by approximately 5% versus last year’s second quarter.

Early in the quarter, unit shipments into the domestic lawn and garden market were quite strong. In the last half of the quarter these shipments declined unexpectedly, primarily as a result of cool, wet spring weather and excess inventory in the hands of the OEM's that they supply.

Toro cut deliveries significantly at the end of the quarter. The product sold well at retail, but Home Depot had excess inventory and cut deliveries. Other retailers also cut deliveries.

MTD cut deliveries at the end of the quarter due to high retail inventories at Lowe’s and TruValue.

Shipments into the snow market increased by nearly 14% from a year ago. Average selling prices have remained constant.

European Engine Market:

Engine demand was negatively impacted by weather conditions, namely record high temperatures and near drought conditions in some areas of the continent. As a result, European volumes decreased by nearly 15% from the second quarter a year ago.

European sales were negatively impacted by the strong European currency.

Second Half Outlook:

Results will be very difficult to predict with any degree of accuracy.
Demand in the third and fourth quarter will not be robust.
The strength and duration of the snow season will have a significant impact on results.
Demand, particularly for walk-behind rotary mower applications, is uncertain.
Timing of new product delivery and customer acceptance of product are currently unknown.
OEMs have not notified them which models or SKUs that they will be on.


Note: The author is currently short BGG.

Catalyst

Sales and orders