Analyst Sees "Short-Term Opportunity in Briggs and Stratton"

Overview

Briggs and Stratton is the largest manufacturer of small gasoline-powered air-cooled engines for outdoors equipment. Eighty-four percent of the company's sales are to original equipment manufacturers (OEMs) for use in this equipment. Briggs and Stratton also manufactures generators and lawn mowers amongst a multitude of other garden equipment.

Financials

Briggs and Stratton maintains a leveraged balance sheet with $226 million in long-term debt. With $188 million of cash on had, the company can easily cover its fiscal obligations, and the leverage should work in favor of the investor.

As a mature company, Briggs and Stratton has generated exceptionally steady revenues over the past decade. Nonetheless, revenues have declined in eight of the past ten years.

A similar trend of declining cash flows is also of concern. In light of this, management has finally taken action and has begun significant restructuring activities which have clouded the results of the past two years. In 2013, revenues declined from $2.1 billion to $1.9 billion.

The company's income was impacted by $18.8 million in restructuring charges, and by over $90 million in goodwill impairment. $29 million in cash was also funneled to the company's underfunded pension, further hurting results.

Nonetheless, gross margins increased from 16.3% to 17.7%, something that the company attributes to lower costs and increase working capital efficiencies.

The company has aggressively returned capitol to shareholders with a variable cash dividend along share repurchases. In 2013, the company returned over $30 million in cash to shareholders via these share repurchases.

Positive Trends

While the market for landscaping equipment is relatively stable, there are indications of potential strength in the near-term future. With the strengthening economy, sales of consumer goods are rising, and that should definitely benefit Briggs and Stratton.

Although market data on year-over-year sales of lawn mowers is not widely available, by tracking interest by means of Google (GOOG) search popularity (limited to United States searches), we see a steady sinusoidal trend with consistent amplitude for three years from 2010-2012.

While interest reached the same nadir on the off-season, in 2013 interest in lawn mowers increased by almost 25% from the prior three seasons.

The divergence from the trends in lawn mower interest alone can be considered a statistical fluke, but a few more searches indicate similar trends across the industry.

Extrapolating sales from search terms is not possible, but overall, enormously increased interest in the term will almost definitely indicate future increases in sales.

In another chart, we can see the drastic effect which storms have on interest and sales of emergency generators. The peaks in the chart below directly correlate with significant storms. While the current hurricane season has been surprisingly quite, experts have predicted an above-average hurricane season. Thus, generators are a wildcard for the company and cannot be accurately incorporated into sales models.

On the heels of Briggs and Stratton's first loss in a decade, the shares are trading at a reasonable 0.5 times sales and 13.6 times expected 2014 earnings. Historically, share price has been steadily correlated with profitability, and for this reason they have underperformed this year.

An anticipated return to profitability, along with the heavily positive indicators for sales should drive the shares higher in the short-term. In the longer term, results will be dependent on management's ability to effectively restructure the company and compete in a mature industry, along with secular economic conditions in the market overall.

Marc Gilbert          www.seekingalpha.com