Tool manufacturer Black & Decker Corp., feeling the pinch from a slowdown in the housing market, recently posted flat sales and a 22-percent drop in profits.
But executives say the Towson company will overcome short-term challenges by rolling out new consumer products and taking advantage of a strong free cash flow for share repurchases.
Black & Decker reported second-quarter sales of $1.7 billion, factoring in a 2-percent gain from foreign currency exchange rates but virtually unchanged from last year. Net income fell 22 percent to $118 million ($1.75 per diluted share) from $152.2 million ($1.98) a year ago.
“We certainly don’t expect housing to improve any time this year,” Michael D. Mangan, the company’s chief financial officer, said in a conference call. But, he noted, the decline in residential housing starts is affecting the entire industry.
A surge in the costs of raw materials, including nickel, copper and zinc, is also a “major issue,” he added. These costs are expected to rise $150 million for the year, according to Robert W. Baird & Co.
“We do, however, have momentum in the factors we control,” Mr. Mangan said, referring to the debut of new cordless and lockset products.
The company’s three business segments include: power tools and accessories; hardware and home improvement; and fastening and assembly systems.
During the three months ended July 1, sales in the power tools and accessories segment slipped 2 percent as gains in the company’s European business were unable to offset domestic losses. Likewise, the hardware and home improvement sector saw a 3 percent drop overall, as the company’s lockset business is tied in particular to residential construction. The fastening and assembly systems division grew 1 percent.
“Looking ahead, we expect that the weak U.S. housing industry and significant commodity inflation will continue to adversely affect our earnings comparisons,” said Nolan D. Archibald, chairman and chief executive officer. “Through discipline and a focus on execution, Black & Decker has become a stronger and more balanced company over the last five years. As a result, we met our expectations this quarter and believe that we will continue to weather the slowdown effectively.”
Of 13 analysts, two assign a “buy” rating to the company, according to Bloomberg News.
Because of the housing slowdown, sales will remain flat for at least the next few quarters while commodity costs continue to climb, thus “creating a continued downward bias to estimates,” said Sam Darkatsh, an analyst with Raymond James & Associates Inc., which does investment banking for Black & Decker.
Likewise, Peter Lisnic of Robert W. Baird & Co. cited supplier agreements that expire next year as additional sources of uncertainty amid growing commodity costs. However, he said, offsetting the uncertainty is the company’s strong free cash flow, which it can use for acquisitions or share buybacks.
Despite near-term risks, the company benefits from a strong reputation, said Mr. Lisnic, whose firm does investment banking for the company. Black & Decker “is able to command premium pricing due to continued product innovation, reputation for quality, and sheer brand power.”
Shares of Black & Decker closed up $1.48 at $89.09 on the New York Stock Exchange yesterday.
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