'Expectations' game unfairly drills well-run Black & Decker

THE BALTIMORE SUN

THANK HEAVENS we learned our lesson from the stock market commotion of the past five years. It's the long-term that matters, we now know. Put quarterly profit results calmly in perspective, and don't play the "expectations" game in which companies must exceed some arbitrary hurdle or else.

So when Black & Decker's fourth-quarter earnings beat analysts' estimates by 3 cents a share last week but failed to exceed an even higher "whisper" number, we knew exactly how to behave.

SELL!! Call Homeland Security, too.

Black & Decker's stock fell almost $4 a share, or 5 percent, whacking $300 million off the Towson toolmaker's value the same day it reported the best quarterly sales and profits in its history.

The chipmunk-cortex method of portfolio management is back in business. Maybe CNBC, Scottrade and the other operations dedicated to the proposition that 1.5 billion shares trading daily on the New York Stock Exchange is "light volume" don't have anything to worry about after all.

Black & Decker's problem was instantly diagnosed by the people on the Yahoo Internet message boards, who approached it with their usual sagacity and decorum.

"I can't believe this!!!!," "You Idiots!!!!" and "SMELL THE COFFEE" were headers on the more informative postings. The reasons to dump Black & Decker's stock, the discussants believed, were insider selling, dubious acquisitions or disturbing patterns in the technical entrails. Or maybe competition from companies with better lithium-ion batteries.

But don't blame Black & Decker's dive on a couple of unshaven day traders. More than 3 million shares changed hands the day earnings came out - five times normal.

The company's real problem, FTN Midwest analyst Eric Bosshard told The Sun, was that investors had "very high expectations" for the quarter.

Boy, did they. Their expectations didn't just include a 29 percent sales increase, which Black & Decker achieved. They didn't just want even bigger growth in profits - 36 percent, as it turned out. The $526 million in free cash flow Black & Decker generated last year was also fabulous - but not quite the thing.

The investors wanted even better results, results - I don't know - like the ones WorldCom, HealthSouth and Enron delivered in the 1990s. They apparently wanted book-cooking and fantasy, but Black & Decker told the truth. And for that it got penalized.

(When any company announces that it missed analysts' estimates I give it a little gold credibility seal. If executives were going to lie they'd at least make the quarter.)

The most-negative information in last week's earnings report appears to have been Black & Decker chief executive Nolan D. Archibald's forecast of "low to mid-single-digit sales growth" for 2005 even as he expects profit growth to continue expanding at a double-digit rate.

That shouldn't have been a surprise, since sales grew 20 percent last year and adding revenue on top of that would naturally be difficult. This is a toolmaker, after all, not some biotech outfit with parabolic sales projections built into the stock.

And growth is growth, Black & Decker tends to under-promise and over-deliver, and profit margins continue to expand. At 13 times next year's estimated earnings and paying a 1 percent dividend, the stock is not expensive.

And the company is a cash machine, sitting on $514 million that might be employed in share buybacks or dividend increases.

Investors seemed to rethink their aversion to Black & Decker by the end of last week. After the earnings-day disaster, the stock rose $1.44 to close the week at $80.91.

I don't know whether Black & Decker will go up or go down from here, and I don't care. I don't own it or any other stock I write about.

But I do know that there wasn't enough information in last week's announcement to trim $300 million off Black & Decker's value in a day. Awhile back, Harvey L. Pitt, then Securities and Exchange Commission chairman, briefly flirted with the idea of requiring companies to disclose financial results more often, such as once a month.

No thanks, Harvey. Once a quarter is plenty.

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