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Friday, January 10, 2003 2:49:25 PM
By Dinah Wisenberg Brin
Of DOW JONES NEWSWIRES
PHILADELPHIA (Dow Jones)--Disappointing December sales at Home Depot Inc. (HD) shouldn't affect building products makers' fourth-quarter financial results, but could spell uncertainty for the companies in 2003.
Several key building products players are expected to post higher earnings in the fourth quarter compared with a year ago, although competitive pricing pressures among power tool makers and ongoing softness in industrial end markets may dampen some results.
Power tool maker Black & Decker Corp. (BDK) has announced that it expects to meet or beat Wall Street earnings estimates of $1.01 a share for the fourth quarter, compared with 72 cents of operating earnings in the year-ago period. Black & Decker had a net loss of 16 cents a share in the fourth quarter of 2001, when it took a large restructuring charge that included job cuts and plant shutdowns.
Sherwin-Williams Co.'s (SHW) chairman and chief executive told Dow Jones Newswires in late December that the paint company was sticking with operating earnings guidance of $2.00 to $2.06 a share, or net income of 79 cents to 85 cents a share. That indicates fourth-quarter net income of 32 cents to 38 cents a share, compared with 29 cents a year earlier.
Analysts expect earnings of 39 cents a share for Sherwin-Williams in the fourth quarter, according to a Thomson First Call survey consensus.
"Home improvement activity and homebuilding activity have still been reasonably strong," Merrill Lynch & Co. analyst Joseph Sroka said.
Sroka predicts fourth-quarter earnings of 36 cents a share for Delta faucet and KraftMaid cabinet maker Masco Corp. (MAS), a penny less than the analyst consensus view and a nearly 40% gain from the 26 cents a share that Masco earned in the fourth quarter of 2001.
Hand tool and hardware maker Stanley Works (SWK) faces a flat fourth quarter, according to analysts, who cite the effects of the soft industrial market. Analysts, on average, forecast earnings of 56 cents a share for Stanley, compared with year-ago net income of 7 cents a share, including special charges, and operating income of 57 cents a share.
Home Depot's Jan. 2 warning that its fourth quarter would be softer than expected caused investor concern for building products companies, but Sroka doesn't expect Home Depot's woes to shake their fourth-quarter results. Fiscal 2003 remains a question, however, he added.
The home-improvement retailer said it expects earnings of $1.53 to $1.55 for the fiscal year ending Feb. 2, compared with a previous estimate of $1.57 and year-earlier earnings of $1.29 a share, and said fourth-quarter same-store sales could fall as much as 10%, a steeper drop than the previously forecast 3% to 5%. Home Depot cited lower-than-expected December sales, and said it expects a challenging environment well into its next fiscal year.
Competitor Lowe's Cos. (LOW) reaffirmed its own fourth-quarter earnings guidance, including same-store sales growth of 2% to 4% and earnings of 33 cents a share, and said full-year earnings should increase 37% to $1.78 a share.
"It begs the question for 2003, just where is the market headed," Sroka said. The Home Depot and Lowe's outlooks send "sort of a mixed message," he said.
Housing remains strong while the industrial economy has been weak but may be improving somewhat, he said. High oil prices are a negative for the building products companies, but the euro is strong relative to the dollar, which is a positive, Sroka said.
"It's obviously early to call 2003 as a whole," he said. But Sroka said Black & Decker, Sherwin-Williams, Stanley Works and Masco all are gaining market share in their end markets. The analyst said he doesn't own shares in any of those companies. Merrill Lynch has investment-banking business with Masco and Stanley but not with Black & Decker or Sherwin-Williams, he said.
Strength Seen In Consumer Business
Parker Hunter Inc. analyst Lawrence Horan said building products companies generally should post very good fourth-quarter results on the consumer side of their businesses but weaker numbers on the industrial and commercial side.
"Manufacturing's been sick for a long time but the consumer's been strong," he said. Black & Decker, Sherwin-Williams and Masco should report gains for the period, but Stanley Works will have a flat quarter because "they're getting hurt on the industrial side," Horan said.
He noted that Masco, expected to post a large gain, sells primarily residential products. Horan said he owns shares of Masco, Sherwin-Williams and Stanley Works but not Black & Decker. Parker Hunter doesn't do investment-banking for any of those companies, he said.
Janney Montgomery Scott LLC analyst James Lucas said it's unclear how softness at Home Depot will affect the chain's buying patterns and building products companies in 2003. The fourth-quarter effect is less of a concern because the retailer already bought the building products, but it remains to be seen how much inventory will be left, he said.
The power-tool arena continues to face competitive pricing pressures, Lucas said. The emergence of TechTronic Industries Co.'s (H.TEC) budget power-tool line, Ryobi, at Home Depot has created a "trade down phenomenon," he said.
Still, Lucas said in an interview, Black & Decker "had a number of neat products during the holiday season, which has become a trademark for the company."
Home Depot is an important customer for Black & Decker, but not its only one, as the company enjoys broad distribution, he said later in a research note. The company has a diverse portfolio of products and two of the strongest brands in Black & Decker and DeWALT, he wrote.
Black & Decker should benefit from having closed some plants in high-cost locations, Lucas said. The company should do all right in the fourth quarter, he said. Lucas forecasts earnings of $1 a share, a penny shy of the consensus.
In contrast, a little more than half of Stanley's business serves industrial end markets, which remain soft, Lucas said. Stanley depends on holiday sales less than power tool manufacturers, so Home Depot's slower December sales should not bode ill for the company's bottom line, he said.
Janney already was expecting a challenging fourth quarter for Stanley because of sluggishness in industrial end markets, he said. Stanley's recent purchase of Best Access Systems allows the company to enter the faster-growing security market and should contribute to earnings in 2003, Lucas wrote.
Diversified manufacturer Pentair Inc. (PNR), which makes power tools near the pricier end of the spectrum, as well as water pumps and enclosures for electronic components, has been subject to the pricing pressures affecting the power-tool sector, Lucas said.
Pentair should fare well in terms of revenue but pricing pressure will probably compress margins, Lucas said. He expects Pentair to earn 51 cents a share in the fourth quarter compared with 27 cents a share a year earlier, when tool business difficulties resulted in a rough showing. His estimate is 4 cents below the consensus view and less than the company's own guidance.
Pentair has exposure to Home Depot's home-center channel but its Delta and Porter-Cable tool brands are less dependent on the chain than in the past, and the company's faster-growing exposure to Lowe's should help fourth-quarter results, Lucas said.
Pentair has been working on its cost structure and positioning itself for an industrial recovery, and two acquisitions should contribute to the bottom line in 2003, he said.
Lucas rates Black & Decker, Stanley and Pentair at buy. He said he doesn't own shares of the companies and said Janney hasn't done investment-banking for them recently. Janney research notes on each company said the firm expects to receive or seek investment-banking compensation from the businesses in the next three months.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com
(END) Dow Jones Newswires
01-10-03 1201ET
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