SELL Briggs and Stratton (BGG) at the Market

The time has finally come to issue a SELL recommendation for Briggs and Stratton (BGG.) The stock has performed moderately since the Research recommendation was issued on April 16, 2008. This company is poised to go beyond the $20.70 level. However, we seek returns that exceed guaranteed funds in the shortest period of time.

BGG was recommended when it was trading at $17.52. As of Monday September 18, 2008 BGG was quoted at $19.00. This equals a return of 8.44% in five months. Conservatively, on an annualized basis this would equal approximately 20.25% return. Selling this stock now also generates a return 65% above the amount of the dividend yield if the stock was held for a whole year. This stock will definitely be purchased again down the road.

It is always recommended that when selling a stock, one should not place an order after hours or when the market is closed. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers.

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Update: Briggs and Stratton at $14.89

Briggs and Stratton collapsed 13% on Thursday April 17 when the company "...reported net income of $37.1 million, or 75 cents a share, for its fiscal third quarter, compared with $9.3 million, or 18 cents a share, a year earlier, when results included a large writedown. The company said it expected full-year earnings in a range of 60 cents to 71 cents per share, compared with Wall Street forecasts of a $1.19 per share in full-year profit."

This was not exactly the best news for the company, however it was great news for prospective investors. At this point we are now much clearer on where the company is going to get the money to pay its annual dividend. Also instructive was the fact that year-over-year 3Q earnings were higher but below the target analysts. This creates an opportunity to acquire this stock at a discount to the market.

Earnings Source:Thomson Reuters

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Research: Briggs & Stratton (BGG) at $17.52

Today's research recommendation is Briggs and Stratton (BGG). BGG produces small engines and their parts. According to Mergent's, BGG has increased it's dividend at least 13 consecutive years in a row.

According to the Valueline report dated January 25, 2008, BGG typically trades around 9x cash flow. Based on this measure, BGG should trade at $20.70 using Valueline's estimated cash flow figure of $2.30 for 2008.

There is one matter of particular concern which I hope will be alleviated over time. The company's dividend of $0.88 per share is significantly above the trailing twelve months earnings of $0.12. In situations like this one of several things have to take place, either earnings have to rise, the company may have to borrow or dip into reserves to maintain the dividend or the dividend needs to be cut. All of these outcomes are potentially positive as a remedy except borrowing to keep the dividend.

Speaking of debt, BGG's long-term debt is down from $508 million in 2001 to $268 million in 2007. This has to be a positive if the debt reduction trend can be continued while maintaining the shares outstanding at the same level.

While the verdict is not out on this stock, I noticed that BGG severely underperforms the market during periods of recession. In the recession of 1990 the stock fell 40% from its high of pre-split price of $25. In the recession of 2001, BGG fell 39% from its pre-split price of $48 all the way down to$29. Since recessions aren't usually determined until after the fact and with BGG already down 47% from its one year high of $33.40 back in June of 2007 we could see limited downside risk.

Best of luck on your research with this stock. Touc.

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