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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerBlack & Decker (BDK) is on my watch list and has popped up several times in the last month on my AOL Alerts. As I write, it is hovering around $70 per share, retracing its steps back down to an 18-month low from January 2004 (see chart).
At this point it has a P/E ratio of 11 and a dividend yield of 2.1%, which are both attractive. No doubt the slowdown in housing starts and poor earnings reports from homebuilders has weighed on the stock price, which earlier in the year had reached $94.90 a share.
Looking at its fundamentals, what stands out to me is its price-to-sales (P/S) ratio of 0.93 and its trailing return-on-equity (TTM-ROE) at 36 over three times the P/E. If you check out its five year perfomance, you will see it has consistently added to shareholder equity. This is something I consider imperative prior to allocating my resources. If a company cannot manage its money, I'm not giving them mine.
Two issues that are of concern to me are 1) they do have some debt (seemingly manageable) and 2) they may still have some downside if not from the economy, then from investor sentiment. Tough call at this point but certainly one to watch. The company's earnings report of July 26, 2006 discussed real year-over-year growth in free cash flow of $100 milion and new products (DEWALT's next-generation XRP(TM) cordless line and a variety of consumer tools) that they hope will lead to continued organic growth.
Black & Decker has increased its share buy-back program and this is usually a symbol of confidence. At current levels I think BDK may be approaching fair value. Now I have to decide what I'm looking for as a discount to that to add a safety factor. Might need another $10 bucks to get there. James Cramer in his Cramer's 'Mad Money' Recap: Down in Front - TheStreet.com made bullish comments on the stock but there was no "Cramer factor." However, everything I see says: keep your eye on Black & Decker.
Sheldon Liber is the CEO of a small private investment company and the vice president for Design and Research of an Architecture & Planning firm.
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Reader Comments (Page 1 of 1)
8-04-2006 @ 9:28PM
Mr. noitall said...
Hmmm.. No, I wouldn't buy it, it looks like a falling knife to me. Too risky. I don't know the numbers but I would guess that their production costs are rising due to higher energy, commodity, & labor costs ( all those power tool motors use copper windings I believe and we know the cost of copper has gone way up lately). Also I would guess that due to the recent housing & constrution boom they most likely over-expanded like most companies do during a boom, so they are now producing more than they will be able to sell.
8-07-2006 @ 10:06AM
Sheldon said...
Mostly true 'noitall', but...
Copper prices have been up for quite a while and accounted for; energy prices affect the entire world not just them-- but your right that it could affect macro-economic trends; over expansion I don't know; however keep in mind that even a HUGE 50% drop in earnings only drives their P/E to 16.5 which is the S&P average. It may be a falling knife that is slowing down. Like I said another $10 bucks might be the right safety factor. At what number does it become a value to you?
8-07-2006 @ 7:23PM
Mr. noitall said...
Well, I wouldn't be so sure that copper prices have been accounted for by investors yet. Just look at what happened to U.P.S. recently, something as obvious as higher fuel prices wasn't noticed till U.P.S. came out with their earnings report and look how the stock got punished. I personally wouldn't by BDK (unless it got very cheap, I think there are some better opportunities out there right now), but I think waiting for that $10 cushion would be best for anyone interested in buying it.