Briggs & Stratton
Corporation (BGG, $20.65): “A Stalling Engine of Slow Growth”
By: Sarah Hillegass, AIM Student at
Marquette University
Summary
·
Briggs & Stratton (NYSE: BGG), headquartered in Wauwatosa, WI, manufactures
equipment and engines for manufacturers (OEM’s) in the lawn and garden
equipment and engine powered equipment industries. BGG has two segments: Engines
(60% sales) and Products (40%).
·
The Engines
segment has improved profitability by shifting to a more commercial sales
approach, rather than residential. This market is highly reliant upon new home
sales.
·
The Products
segment has faced severe headwinds in sales of snow throwers due to less
inclement weather, which has decreased profitability. New debt and poor
international expansion has put extra pressure on financial performance.
·
BGG has
climbed steadily over the last month from $18 to almost $21. Around $20, many
insiders sold BGG in large volumes. This signals that the stock may be
overvalued.
·
After
holding BGG for nearly two years, it is in the same position now as when it was
added to our portfolio. Therefore, I would recommend a SELL for BGG. While it
is a great business, there is not enough growth/value to contribute to our
portfolio performance.
Key Points: In late October, Briggs & Stratton
released their first quarter report for fiscal year 2017 for the months of July
through September 2016. While reporting typical negative first quarter earnings,
BGG slightly beat consensus expectations. However there appear to be minimal
bright spots for BGG in the near future. BGG’s two operating segments, Engines
segment (60% sales) and Products segment (40%), both face lackluster end
markets. BGG’s business is highly cyclical to weather and the housing market.
Therefore without major initiatives in place, BGG will perform according to
macro influences.
The primary bright
spot shines through in the Engines segment with regards to the lawn and garden
equipment industry. The industry constitutes 87% of the Engines segment sales. BGG
is focused on transforming sales into more commercial markets than residential markets.
This would help improve margins and create more stability to BGG’s business. The
beneficial impact in gross margins for the segment increased from 15.8% in 1Q16
to 20.1% in 1Q17. However, BGG’s sales to the industry are still primarily for
residential applications. As presented at the Baird Global Industrials
Conference on November 8, home ownership is at lows not seen since the 1960’s,
with more adults renting apartments instead of buying homes. This hurts BGG’s
potential market, since mower sales are highly correlated with new home sales.
Outside of the Engines segment, the parts distribution channel has the
potential to become more efficient with BGG’s increased stake in Power
Distributors, LLC. This will help streamline domestic products distributions to
support power equipment customers. Additionally, Hurricane Matthew sales of
generators may impact sales for 2Q17, but management has no estimates to
quantify that.
However, BGG faces
many hurdles in the short term to overcome. The Products segment as a whole has
faced significant headwinds in sales and gross margins. With less inclement
winter weather, there have been fewer snow thrower sales. This decreased
margins by 290 basis points to 15.2%. Additionally, revenue recognition was
changed for engine shipments to overseas customers starting in 1Q17.
Previously, revenue was not booked until the customer received the engine
shipments, which meant potential deferrals because of in-transit shipments.
Now, revenue is booked when the engines are delivered to a carrier. This
adjustment increased the amount of sales to report for the engines segment in
1Q17, but on an adjusted basis compared to last year’s numbers, 1Q17 sales were
down by nearly $14 million. This decline was due to less demand from equipment
manufacturers as production moved closer to season to lower operating costs.
Outside of the two
operating segments, BGG faces financial concerns. In 1Q17, BGG called on $50
million from a revolver. This increased BGG’s short-term debt obligations. Cash
went from $90 million in 4Q16 to $40 million by 1Q17. Additionally, the total
debt to capital ratio increased from 31% to 37% in the same timeframe. This is
higher than it has been over the last three years. While management’s
intentions are to expend geographically, acquire companies, and return cash to
shareholders, the results have not helped performance. The international
expansion has not grown, with exposure of 27% of sales in 2010, and only 28% in
2016. The acquisitions BGG wants to participate in would deplete cash farther
and push the debt ratio higher. Finally, with few initiatives in place to
improve business operations, BGG’s EPS will primarily grow due to share
repurchases that were expanded by $50 million in April 2016.
What has the stock done lately?
BGG has climbed
from a low of $18 to a high around $21 over the course of the last month. This
increase was primarily driven by better than expected 1Q17 results and forecasts.
However, trading at a P/E multiple of 30x, BGG appears significantly
overvalued. Also, management has been selling shares in the open market. In an
8-K filing on November 14, BGG’s CEO, Todd Teske, announced he plans to sell
150,000 shares of his nearly 400,000 shares. Additionally, Senior Vice
President, William Reitman, sold 15,000 of his 80,000 shares at the end of
October.
Past Year Performance: Over the last twelve months, BGG’s total
return was approximately 22%. BGG traded at a low of $15 and a high of $24. Over
the same timespan, the RUSSELL 2000 index’s total return was roughly 17%.
Therefore, over the past year, BGG has performed relatively well, with the
stock price appreciating nearly 11%. However, more than double the amount of
shares that were bought of BGG were sold from insiders.
Source: FactSet
My Takeaway: From what is disclosed
in public reports, I believe that BGG is not in a great position to grow and
provide returns to shareholders over the coming year. Due to the macro
cyclicality of the industry, BGG has to have efficient, lien operations to
remain profitable. The lackluster sales in either segment mixed with a weaker
balance sheet make for a riskier investment. I would recommend selling a
position in BGG. While BGG is a great business with an essential product, the
stock is in the same position as two years ago when it was added to our
portfolio. If the balance sheet improves, complemented by stronger organic
growth, it may be a great investment.
