|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||718||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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BGG is the world’s leading producer of air-cooled gasoline engines, which are used primarily for outdoor power equipment (OPE: lawnmowers, portable generators, pressure washers, etc.) A nearly “perfect storm” of issues has caused dem
The market for engines (air-cooled, four cycle, 3.5 to 25 horsepower) used for OPE is mainly the Western world (US,
Inroads by Chinese engine makers have been a much talked about threat for a number of years but have been limited by a number of factors. Highly automated assembly (e.g., <30 minutes of labor in a walk mower engine) means that whatever labor cost advantage the Chinese might have is more than offset by shipping costs. The seasonal nature of lawn
Both the manufacture
BGG could be compared to a solidly built house in a neighborhood that you would think twice about living in. A 70% market share puts them in a position where the OEMs
What Really Drives Demand BGG has been making engines for nearly a century
The Generator Issue BGG acquired the consumer operations of Generac in 2001, adding considerable goodwill to its balance sheet
Earning, etcetera At its present price, there is significant appreciation potential based on the seemingly low hurdle of the company being able to generate FCF in line with the average of the past decade ($2+)
Nearer term, how well BGG does in the FY that just started will depend more than anything on where consumer sentiment is next spring. It is unlikely to be worse than it was in 2008, how hard will it be for it to be just a little bit better? After three years of below normal replacement dem
The company has been wringing costs out (an estimated $143MM over a five year program through FY 08)
The balance sheet is reasonably strong, but it important to note that BGG has a very seasonal need for borrowing. In addition to $266MM in LTD, the company has a $500MM revolver that expires in July 2012 that is used to fund a working capital build that peaks in about February. It reached $300MM during FY 08, when the company had some LTD come due. The most restrictive covenant is that borrowing must not exceed 3.5 times TTM EBITDA during Q1
The management team has tried to be good stewards of capital. The present impact of the Generac acquisition would be the most questionable issue in this regard. They were early adopters of EVA (the CEO co-authored a book on it) and other than making an acquisition of a business that added volatility they have “walked the walk”, globalizing (actually going south, and then establishing toeholds in China and Eastern Europe) what was for generations a classic “Rust Bowl” manufacturing presence in
Downside Risk Before describing my evaluation of what the downside might be, we have to consider what could get worse for BGG. Considering how stretched
I think downside risk is limited to about $11. The stock has not traded below BV since 1987, when it traded at .99 times. The book now has a large intangible component due to the acquisitions made in 2001
Appreciation Potential As implied in earlier statements, I believe that with dem
Conclusion: Based on my understanding, it would seem that at its present price, BGG has risk of a couple of points and well above average appreciation potential over the next year or two. Absent a landed hurricane, it might be dead money through the next couple of quarters (September and December tend to be nominally profitable at best.) while investors wait for clues about consumer confidence during the next OPE selling season, but then again it might not. The 6% dividend will kind of take the edge off of that possibility.
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