Briggs & Stratton Corporation (BGG) shares cratered by more than 50% after it reported weak Q419 results, reduced its guidance, and slashed its dividend in the middle of August. In the run up to the November 1st announcement of Q120 results, shares recovered more than 100%, but subsequently have slipped again to about $5.30. This is roughly 35% below where they traded on August 14th before the disappointing Q419 results were announced.
In the aftermath of a massive decline, recovery, and retreat in price much has been written about Briggs & Stratton’s (aka Briggs) weakness as a stock and as a company. The focus has primarily been on negative trends in revenue, profit margins, debt, cash flow, and industry positioning. The arguments in these articles are well taken and provide a solid basis for avoiding shares of Briggs based on its poor fundamentals. At the risk of seeming to “pile on”, I offer another critical assessment of Briggs that addresses additional problem areas.
The focus of this article is on Briggs’ pattern of aggressive guidance and unmet projections. Shares remain off limits for me until the company materially improves its debt situation, consistently provides attainable guidance and projections, and shows improving operating results.
Briggs’ management has been aggressive in its revenue guidance since at least the fourth quarter of 2015 when the initial 2016 guidance was given. The company guided full year 2016 revenue of $1.93 billion (at the midpoint) which represented 2.1% growth over the $1.89B revenue in 2015. When actual 2016 revenue of $1.81B was reported four quarters later, this initial guidance proved to be about 6.6% too high. And instead of growth of more than 2%, revenue in 2016 was actually about 4.2% less than 2015.
It is reasonable that the first pass at giving guidance should be the most inaccurate as there is the most time for conditions to change. This was the case for 2016 revenue guidance as the company did eventually reduce its guidance (but not by enough) in the final quarter before reporting actual results. But for 2017 management initially guided revenue growth and then actually guided higher growth in subsequent quarters when actual revenue again declined.
Specifically, the company first guided full year 2017 revenue of $1.865 billion (at the midpoint) which represents 3.0% growth over the $1.81B revenue in 2016. In the three subsequent quarters guidance was elevated to $1.88B of revenue, or 3.9% growth. Ultimately the revenue for 2017 was $1.79B, or a decline of 1.1%.
For 2018 management’s initial revenue guidance of $1.895B was only 0.7% above actual 2018 revenue of $1.881B. However, guidance was raised in the second and third iterations of guidance before being lowered in the final guidance which was $1.915B, or about 1.8% above actual revenue. In all, 2018 guidance was the most reliable of the four years examined, but it must be noted that each quarter the revenue guidance given was above what actually transpired.
Finally, a similar pattern was followed for 2019. Initial guidance of $1.96B (growth of 4.2%) was first raised to $1.98B but then lowered to $1.93B and then again to $1.885B. Actual revenue for 2019 came in at $1.836B which means that the twice lowered final guidance was still 2.7% more than actual revenue.
There is a pattern here. Guidance is initially given that is ultimately too high, and then is either maintained or even raised before being lowered in the final guidance which is even then more than actual revenue. Secondly, every one of the 16 quarterly revenue guidance ranges given for 2016-2019 was higher at the midpoint than the actual realized revenue and only one of the 16 low ends of guidance was less than the realized revenue. The range of overestimation was 0.7% given in Q417 for 2018 to 7.8% given in Q119 for 2019. The average for the 16 guidance figures was an overstatement of 4.6%.
The second crucial metric that is guided quarterly by management is adjusted net income, which excludes the non-recurring costs of both the business optimization program (“BOP”) and the consolidation of manufacturing plants. While the non-recurring nature of these items can be disputed, they will be accepted at face value as they are the primary profit item guided by management.
As with the revenue guidance, the adjusted net income guidance for 2019 was far off the mark to begin with at $62M (at the midpoint), was raised to an even greater level before being lowered in consecutive quarters to $21M (at the midpoint), or $33.9M above the actual loss of $12.9M.
On a dollar basis the adjusted net income guidance was closer to the realized amount for 2018, 2017, and 2016 than 2019 but still overstated each quarter. For 2018 the pattern was initial midpoint guidance of $60M or 7.5% above actual adjusted net income of $55.8M followed by consecutive increases and then a final decrease to $61M, or 9.3% more than the realized adjusted net income.
For 2017 and 2016 the final adjusted net income guidance was an increase from the initial guidance. For 2017 the final midpoint guidance of $60.5M was 6.7% greater than the realized adjusted net income of $56.7M compared to the initial midpoint guidance of $58.5M, or 3.2% more than the realized amount. Similarly, for 2016 the final guidance of $59.5M at the midpoint was 8.2% greater than the realized amount of $55M compared to the initial midpoint guidance of $57.5M, or 4.5% more than the actual adjusted net income.
One last observation about Briggs’ guidance is that the final guidance, which occurs in the third quarter of the fiscal year, is given in late April which is in the middle of the peak seasonal spring and summer seasons. Because of this proximity to its critical selling period it is quite remarkable that the final guidance has averaged about 3.4% above actual revenue (compared to 4.6% overall) and about 8.1% above actual adjusted net income (excluding 2019 when adjusted net income was -$12.9M compared to guidance of $21M). This lack of accuracy so late in the selling season suggests either a lack of visibility or unwarranted optimism from leadership.
Earlier we stated that the non-recurring nature of Brigg’s adjustments to net income can be disputed. Specifically, the company announced a $50M-$55M BOP in August 2017 in which some manufacturing would be brought back to the U.S. from overseas and a new ERP business process system would be implemented. The company then announced a plan in August 2019 to consolidate some manufacturing production into a single plant in Missouri. These recent programs result in “adjusted” expense items which, like charges for restructuring in 2013 through 2016, are also adjusted out of the income statement as non-recurring.
The distortive impact of the adjustments to profitability has been significant. Since 2015, the average adjustment to EPS has been $0.73 which represents 2.8x the average GAAP EPS of $0.26. Put another way, average adjusted EPS of $0.99 is 3.8x the average GAAP EPS. Clearly a much rosier profit picture is painted by the reliance on adjusted net income rather than GAAP net income.
Besides recurring annually (except 2017), all of the adjusted amounts are real costs that must be accounted for in assessing Brigg’s profitability. Management forecasts annual cost savings once the BOP is complete and the reported income will certainly not be adjusted lower by excluding the savings amounts. It follows then that the costs incurred to achieve these savings also need to be included.
Another aspect of the BOP is the projections made surrounding it. Initially, Briggs estimated that the $50M-$55M project would achieved $30M-$35M annual savings by 2021. As with its quarterly operating guidance this was too optimistic on the cost side. In Q219 the expected cost was increased to $60M-$70M but the expected savings was increased only to $35M-$40M. The cost increase was driven by higher than expected costs associated with the ERP system upgrade. In Q120 management updated its expectation that the annual savings would be achieved in 2022, a year later than initially projected.
The manufacturing consolidation plan is only more than 1 quarter into implementation and costs ($30M-$35M) and expected annual savings ($12M-$14M) remain on track. Since the initial announcement in August, management has also disclosed that it expects to complete the project by Q320. Interested investors should monitor this project to see if it falls into the pattern of overly optimistic projections seen with the BOP and quarterly operating guidance.
It is difficult to trust the company’s forward-looking statements given its track record of over promising and under delivering. The share price reflects this as it is down from a five year peak of around $27 in January of 2018 to about $5.30 now.
BGG is a beaten-down and volatile stock that in the past 4 months has seen a decline of more than 50%, a 112% recovery, and a 36% decline. I recognize the great profits that were made on the recovery from the August bottom. Great profits were also made by short sellers from August 14th to the bottom two weeks later and again from the interim peak of November 1 to now.
Despite these brief opportunities, this is a stock to avoid for long term oriented investors because of Briggs’ pattern of aggressive guidance and unmet projections on top of its poor fundamentals like perilous debt to cash flow levels, lack of revenue growth, sensitivity to macroeconomics, and a weak competitive position.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.