Monday, October 12, 2009

Black & Decker boosts guidance 125%, stock up just 7% ?? (BDK)

Toolmaker Black & Decker (BDK) announced earlier today that earnings for the 3rd quarter 2009 would come in closer to 90cents than the previous estimate of 35-45cents.


The Black & Decker Corporation (NYSE: BDK - News) today announced that, as a result of better-than-expected sales, operating margin and tax rate, net earnings for the third quarter of 2009 are anticipated to be approximately $.91 per diluted share. The Corporation's previous guidance, issued in July, was for diluted EPS in the range of $.35-to-$.45. The Corporation now expects to report a sales decline of 23% and operating margin of approximately 7.5% for the quarter.

The stock, however, is up just under 7% today. That's because the "quality" of the beat, or increased guidance, is not all that great.

-->> Of the 45cent increase in earnings guidance, 14cents comes from a lower tax rate.

-->> Some sales expected in the 4th quarter were "pulled forward" to this quarter.

"Sales were modestly better than we had anticipated, due largely to earlier-than-expected shipments during the quarter of promotional items in the U.S. industrial power tools and accessories business, which were previously anticipated to occur in the fourth quarter."

So it looks like the entire upside is being driven by a lower tax rate and some sales from the 4th quarter coming earlier than expected = this may not budge full year estimates any higher than the 14cents from the lower tax rate. Investors usually do not give a company much credit for lower taxes driving earnings upside.

Looking a ways out -->> Black & Decker, if they can return to 2006-level profits, could easily see it's shares double:


A return to that level of profitability will depend on higher volumes, as as explained below, better currency translation and friendlier Chinese trade relations:

Black & Decker could make $550million in Free Cash Flow. Putting a 7% FCFY (Free Cash Flow Yield) on that would imply 162% stock upside from here. A ways off, but possible.

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