Briggs and Stratton: Weathering the Storm (Or Lack Thereof)

Briggs and Stratton (BGG), a global provider of engines for all things outdoors, is one of the biggest losers so far this earnings season --- thanks in large part to the mild hurricane season. Reporting the company’s recent earnings on Oct. 19, management made it clear that the lack of nasty summer weather caused a large buildup in generator units. This event hurt sales and led to an $18 million earnings loss. Upon hearing this news, many fair weather (no pun intended) investors migrated for sunnier skies. The stock plummeted approximately 12% since the report and is sitting close to a 52 week low of $25.90.

Although it was the focus, generator sales were not the only negative in the report. The company reported losses and weaknesses in almost every other segment of the business as snowblowers and pressure washers also saw sales slide. The company reported sales of only $338 million and analysts expected $442 million. All this red ink prompted BGG and analysts to ratchet down annual estimates roughly 30%. Ouch! With all this negativity, one has to wonder why anyone wants to own this stock. Well, I do. I want it and the fact that the company made it very clear in its conference call that it recognizes the slowdown in business and is adjusting for it makes my convictions even stronger.

BGG management pointed out that business conditions currently are weak and that it will adjust to meet the new tighter business climate. To do this, the company is scaling back capacity and lowering production to allow inventory levels to diminish over the coming months. These efforts should make the company’s third and fourth quarters stronger in the first part of ‘07. By recognizing the slowdown in business and working through it, I believe that the company has factored in all the bad news and can go about improving the business for the remainder of the year.

Also, judging by the stock’s big selloff, investor sentiment can’t get much worse. Short interest stands at close to 12% and has increased almost 8% month over month. There is no love from analysts as five of the seven covering BGG rate it a 'hold'. Any good news or stormy winter weather could force the doubters to reconsider their positions igniting a rally in the stock. Technically, the stock appears to have formed a double bottom on a six month chart as support seems strong at 25.

Much like hurricanes, snow blizzards also are favorable for BGG and its bottom line. Snowblower and generator sales should pick up during wintry weather. For those of us insomniacs watching the weather channel at 2 in the morning, we saw Buffalo almost buried by a blizzard two weeks ago. Remember, we are still in October. All these factors could allow for the perfect storm in BGG shares, and the stock could test $30+ before warmer weather arrives.

Disclosure: Author is long BGG

BGG 1-yr chart: