Buyers miss solidity of tool maker

Analysts see no holes in Black & Decker, but stock still down

Many suggest purchase

September 26, 1999|By Kristine Henry | Kristine Henry,SUN STAFF

A 12-week downward spiral in Black & Decker Corp.'s stock price has left analysts puzzling over why investors turned sour on the Towson-based power-tool maker, especially since they find few clouds to darken its earnings outlook.

The stock hit a 52-week high of $63.3125 on July 1 but has since steadily dropped nearly 27 percent to reach $46.5675 on Friday.

"We're perplexed and confused and don't understand, but it's an excellent buying opportunity," said Paul Brandeis, an analyst at Banc of America Securities, who rates the stock a strong buy. "As far as we're concerned, there are no fundamental problems or issues. I believe the company is in the strongest position top to bottom that it's been in in 20 years in terms of customers, products, management and focus internally."

Brandeis predicts that the stock will reach $78 within a year.

Profit jumped 30 percent in the three months that ended July 4 to a record second-quarter $70.7 million. Revenue for the quarter fell 8 percent to $1.08 billion, largely because of divestitures and fluctuations in currency exchange rates.

Some say the stock's free fall could be caused by peer companies' poor performance or investor profit taking. Another theory blames fear that higher interest rates will slow construction and, consequently, power-tool sales.

Maytag Corp. -- which, like Black & Decker, is considered a cyclical company tied to the housing market -- saw its stock plunge more than 44 percent this month when it announced that third-quarter earnings would fall far below projections, mainly due to weak sales of its lower-priced appliances.

Additionally, Newell Rubbermaid Inc. stock fell 29 percent this month after the household and office products maker also predicted a disappointing third quarter.

"Black & Decker fits right in the middle [of the two companies] and you can see why Black & Decker is more a victim of being sandwiched," said R. Scott Graham, an analyst at CIBC World Markets. "All stocks are put into groups by the investor community, the idea being that what affects one might not directly affect another one but maybe indirectly.

"There is very little evidence to suggest that Black & Decker has got anything but terrific earnings momentum," he added. "It's guilt by association."

James Lucas, an analyst at Janney Montgomery Scott Inc., agreed that Black & Decker could be suffering because of related companies' lackluster performance. He also said the drop in price might be a result of investors selling their shares when the stock reached $63.

"I've never seen their fundamentals stronger," said Lucas, who rates the stock a buy, the highest rating, and expects the price to hit $70. "They had an analyst meeting in New York a couple of weeks ago and one of the targets the company had was a return-on-sales goal of 12 percent. They raised that goal now to 15 percent, and when a company is raising a target by 300 basis points, it's an indication they are moving in the right direction."

Bob Hunter, vice president of investor relations at Black & Decker, said he can't see any internal reason for the stock's decline.

"I don't think we have any better insight than those people; we're all struggling to figure it out," he said. "We can't control what the market does with the stock price, we can only control what our businesses do."

And by all accounts, business is good.

In January 1998, the company announced that it was selling off many of its assets to focus on three main categories: hardware and home improvement, power tools and fasteners.

Last year, Black & Decker sold its Western Hemisphere household-products business, its glass-making machinery business, Emhart Glass, and its True Temper Sports golf club shaft business for a total of more than $700 million.

Those divestitures, and the resulting $900 million noncash write-off of goodwill last year resulted in an annual loss of $754.8 million, or $8.22 per share.

But excluding one-time charges, net earnings for 1998 were $246 million, or $2.63 per share, compared with $227.2 million, or $2.35 per share, in 1997. Sales declined to $4.56 billion from $4.94 billion in 1997, but the decline was due wholly to divested businesses.

Analyst R. Bentley Offutt of Offutt Securities Inc. in Hunt Valley also said investors may be spooked by potential interest-rate increases, which could slow new-home construction and diminish power-tool sales.

"It isn't happening now, but it could be a concern as far as investors are concerned looking into next year," he said. "It could be a sympathy move more than anything. The company is doing well."

Offutt said he rates the stock as "attractive" and would switch to a buy recommendation if the price were to fall to $45 a share. "They're clicking along very well," he said.

Hunter said he agrees that people might be afraid of a decline in housing starts, but said Black & Decker's business is less tied to that factor than many investors think.

Between 15 percent and 20 percent of sales are directly tied to the housing market, he said, but another 40 percent of sales are made overseas and are unaffected by new-home construction here.

"We feel confident things are going well in the business," he said.

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