We Would Not Bet on BEZ

Baldor Electric (BEZ) is having a fine day today surging ahead nearly 10% and approaching its 52-week high set in April.  The reason for such bullishness is the industrial supply company has raised its sales guidance for the second quarter.  The company now anticipates revenue of $435 million to $445 million topping previous guidance of $415 million to $430 million. In the briefing, the company also said they expect, “operating margin to be slightly better than the peak quarterly operating margin of 14.2%.”  While the increased sales expectation foretells stronger business trends we are concerned that the stock has already appreciated rapidly and looks overheated.

Baldor, which makes industrial electric motors and other equipment, has seen their stock rise more than 40% now since the beginning of the year.  The stock is certainly economically sensitive and carries a beta coefficient in excess of 2, but XLI the Industrial sector SPDR has returned only 7% in that time.  Looking at the historical valuation, BEZ has normally traded between .72x and 1.22x sales per share, and the current metric is on the high side of that at 1.11x as well.  Furthermore, currently trading for 25.6x time earnings, the stock is above its historically established range of 14.1x to 24.5x.  The valuation is not exactly appealing according to our methodology from a risk/reward perspective, as we assume that the market will tend to value a stock’s fundamentals within its historically normal ranges.

Value investors may want to take profits after today’s big run even as fundamentals are improving because the price appears to have gotten a bit ahead of itself.  A significant amount of improvement has already been priced-in, so there is a risk now that they fail to live up to the raised bar.  On a trailing twelve month basis BEZ trades for about 44x earnings per share which is almost 50% greater than the industries average of 30.3x and doubles that average on the S&P 500.  Furthermore, Baldor Electric has missed consensus analysts’ expectations in three of the last four quarters, as most US companies were easily clearing that measure.

We understand that not all investors think alike, but from a value standpoint there are much better stocks.  We are glad to see the company starting to see business improve and its products—many of which are considered energy-efficient—may see a boost from customers looking to lower costs.  That being said, in our view the stock has reflected that potential and then some which is why we recently downgraded it to Overvalued.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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