Opinion on  Baldor Electric Company (BEZ)     Sector: Technology  >  Industry: Electronic Instr. & Controls
Baldor Electric (BEZ) "Trading Transparency"

Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

I never let that nickel sit in my pocket very long!  In fact, a few moments ago, with my 'permission slip' to add a new position in hand, I checked the list of top % gainers on the NYSE and came across Baldor Electric (BEZ), which as I write, is trading at $44.25, up $4.46 or 11.21%.  I quickly checked the latest quarter, which as I suspected they announced 1st quarter 2007 results today.  They reported great numbers and exceeded expectations on both earnings and revenue.  I took a look at the Morningstar.com  "5-Yr Restated" financials on BEZ (isn't it neat how quick you can do this stuff after awhile!), and everything appeared to be just beautiful except for a jump in the outstanding shares recently. (That doesn't appear to be a problem).  The company even pays a dividend and has been increasing it annually!

Anyhow, I took the plunge and bought 140 shares at $44.00/share a few moments ago.  With my new strategy of selling 1/7th of my holdings at appreciation targets, I am trying, not that it makes a real difference, to start out with positions that are divisible by 7.  Actually, as I write it up, that is a pretty silly way to pick a number of shares to buy isn't it? 

Wish me luck!  I am back to my 20 position status.  I am not going to my old goal of 25 positions until I get that margin balance down.  At that point, maybe will go to 25 (?).  If you have any comments or questions please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  I shall try to do a more thorough write-up of Baldor if I get a chance later today or this weekend.

Regards to all of you!

Bob 

As I wrote up earlier today, after my sale of a portion of my Universal Electronics (UEIC) at a gain, I had the "permission slip" to add a new position to my trading portfolio. Earlier today, I purchased 140 shares of Baldor (BEZ) at $44/share to fill out my portfolio. I promised I would let you briefly know why I chose Baldor and how it fit into my portfolio and why

BALDOR (BEZ) IS RATED A BUY

What exactly does Baldor (BEZ) do?

According to the Yahoo "Profile" on BEZ , the company

"...designs, manufactures, and sells electric motors, drives, and generators to original equipment manufacturers and independent distributors worldwide. The company�s motor products include AC and DC electric motors; drives consist of inverter, vector, and servo drives, as well as linear and rotary servo motors and motion control products; and generator products comprise portable generators, as well as industrial towable, mobile light towers, emergency and standby, prime power, and peak-shaving generators."

How did they do in the latest quarter?

The company reported 1st quarter results today and reported revenue growth up nearly 100% to $395.7 million from $192.3 million, and earnings increasing 84% to $11.4 million or $.34/share (or $.52/share excluding 'items'). This beat expectations of analysts on both revenue and earnings, who were expecting profit of $.37/share on revenue of $388.5 million.

How about longer-term results?

Checking the Morningstar.com "5-Yr Restated" financials on BEZ , we can see steady revenue growth, steady earnings growth, steady dividend growth, but with a slight expansion of outstanding shares from 33 million in 2006 to 46 million in the trailing twelve months (TTM). Free cash flow is positive and the balance sheet is solid from my perspective.

What about valuation?

Checking Yahoo "Key Statistics" , this is a mid cap stock with a market capitalization of $2.01 billion. The trailing p/e is moderate at 30.14, but the forward p/e is estimates (fye 30-Dec-08) at 19.30. Thus, with rapid growth the PEG comes in at a nice 1.12.

Baldor, according to the Fidelity.com eresearch website , has a nice Price/sales ratio of only 1.60 (TTM) compared to the industry average of 22.35. However, Baldor's Return on Equity (TTM) is at 15.84%, somewhat below the industry average reported at 20.30%.

There are 45.74 million shares outstanding with 41.20 million that float. As of 4/10/07, there were 2.69 million shares out short representing 10.5 trading days of volume (the short ratio) well ahead of my own 3 day rule for significance. The company has already traded 1.2 million shares, well ahead of the average volume of 357,000, and also well behind the probably residual level of short shares outstanding. This may well be part of a 'squeeze' of the shorts.

The company pays a forward dividend of $.68/share yielding 1.7%. The company, per Yahoo, last split its stock 4:3 in December 1997.

What about the chart?

If we look at the "Point & Figure" chart on Baldor from StockCharts.com , we can see that the stock, which actually traded lower from $23/share in April, 2002, dipped as low as $16.50 in October, 2002, before starting to trade higher to the current $44 level today. The chart looks strong to me.

Summary: What do I think?

Well, I certainly liked this stock enough to buy some shares! Seriously, the company reported very strong earnings beating expectations, they have grown nicely the last several years increasing both revenue, earnings and dividends, the balance sheet is solid and valuation is reasonable. Finally, the chart looks nice. On top of this, there are lots of shares out short which will need to be covered as the stock appreciates, adding to the buying pressure.

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website. 

I received an excellent comment from Doug S. who wrote about my recent write-up on Baldor (BEZ).  Doug wrote:

"Dig a little deeper and I think you'll discover that those revenue
figures are not what they appeared. The revenue from the two acquistions were included and not calculated on a preadjusted basis.

The true revenue growth was 10% not 100%. I called the company Friday morning the the person I spoke with after being transfered about five times pretty much confirmed my suspicions. If you will notice after the initial premarket pop and the conference call the stock went nowhere on huge volume."

Doug, you have made some excellent points in your letter.

If we take a look at the press release from the company we can see what you are writing.  The company reports:

'John McFarland, Chairman and CEO, commented on the Company's results, "We are pleased to report our first quarterly results following our acquisition of Dodge and Reliance. Sales of $396 million were up 106%, earnings at $21 million were up 84%, and earnings per share were up 47% to $0.50. Operating margin for the quarter was 13.2%. Earnings per share were reduced by $0.02 for non-recurring purchase accounting adjustments related to the acquisition. Diluted average shares outstanding increased to 41.6 million in the first quarter."'

You can see that in the same line as writing about the big increase, the Chairman and CEO clearly includes the comment "...following our acquisition of Doge and Reliance."  I don't think there is any subterfuge with the news, or attempt to mislead anyone.

Furthermore, on questioning about the business during the quarter, Mr. McFarland stated, as reported in the same release:

"Q ... How was business during the first quarter?

Sales for the quarter ended March 31, 2007 increased 8%. This comparison is based on 13 weeks of Baldor sales and 9 weeks of Dodge/Reliance sales during the first quarter of 2006. Industrial motor sales (63% of revenue) were up 13%, power transmission products (23% of revenue) were flat, drives sales (8% of revenue) were down slightly, and generator sales (3% of revenue) were up 13%.

International sales (13% of revenue) were up 8% for the quarter, with the highest growth in Latin America and Europe.

We saw sales growth across most industries, including the farm machinery, HVAC, aggregate and oil and gas markets, particularly in oil sands development in Canada. We also saw some softening in the mining industry."

Again, he states that sales '...increased 8%.'   And he details the time period in which the big acquisition was involved. 

But certainly you make an excellent point.  The growth in revenue is related to the acquisition.   But just as important, was the acquisition helpful to the bottom line?  Was the share dilution that occurred after the acquisition made up for by the acquisition itself.  In the 'lingo', I believe the question is whether the acquisition was accretive to earnings?  Or was it dilutive?

Certainly, we cannot fault a management team that can make wise acquisitions that result in greater earnings, can we?

In this particular case,  diluted earnings per share grew 47% to $.50/share from $.34/share.  In addition, the company was able to raise the dividend 6% from $.16/share to $.17/share.  Overall, I do not think that there is any gross mis-step of management in this particular acquisition.  The bottom line is after all the bottom line, isn't it?

I have no great loyalty to Baldor.  I do own shares now, after-all, and I appreciate your input on this stock.  I will sell my shares in a heart-beat if I hit my 8% loss.  On the other hand, I feel comfortable with this acquisition, even if you rightly point out, that the incredible growth in revenue is due to an acquisition.  The rest of the story appears intact.

Thanks again for writing, and if you or anyone else has comments or questions on this topic or on anything that I write, please do feel free to leave your comments on the blog or email me at bobsadviceforstocks@lycos.com.

Bob 

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

As I like to do from time to time on this blog, I would like to share with you the current status of my Trading Portfolio.  I last wrote up my "trading portfolio update" on June 7, 2007, a month ago.  There have been a few changes since then.  But the biggest development has been my partipation in Covestor.  You now can check my Covestor page and see the daily changes, all trades, and my performance relative to the indices and other registered investors.  Thus far, I have been doing quite well as it has been a fortunate month for me especially with he Ventana bid by Roche.  I am always grateful when my portfolio and my investing strategy is woking; but I am aware that there will be times when nothing seems to work.  Sometimes the most successful approach is about persistence and patience.

This past month also found me shaken-out of Gildan Activewear, which seemed to almost know I had sold on a dip and gleefully turned around to move higher making the top % gainers list that same day! O.K. that's a bit too anthropomorphic, but still, don't you just hate those days sometimes :).

So I am back to 19 positions.  Let's take a look at them and I will share with you in order: the symbol, number of shares, date of purchase, price of purchase, latest price (7/6/07), and percentage gain (or loss).

Baldor Electric Co. (BEZ), 140 shares, 5/22/07, $47.19, $50.04, 6.04%.

Bolt Technology (BTJ), 129 shares, 1/12/07, $17.44, $56.43, 223.63%

Cerner (CERN), 120 shares, 2/2/07, $49.76, $58.23, 17.02%

Coach (COH), 61 shares, 2/25/03, $8.33, $49.37, 492.58%

Covance (CVD), 119 shares, 4/9/07, $62.61, $70.19, 12.10%

Hologic (HOLX), 120 shares,  1/31/07, $55.58, $56.46, 1.58%

Harris (HRS), 120 shares, 1/31/07, $50.05, $55.91, 11.71%

Kyphon (KYPH), 125 shares, 5/20/05, $29.21, $53.18, 82.03%

Mesa Labs (MLAB), 210 shares, 5/23/07, $24.05, $24.75, 2.90%

Morningstar (MORN, 140 shares, 11/22/05, $32.57, $47.61, 46.16%

MEDTOX Scientific (MTOX), 350 shares, 6/26/07, $28.58, $29.89, 4.57%

Precision Castparts (PCP), 86 shares, 10/24/06, $69.05, $127.82, 85.11%

Quality Systems (QSII), 88 shares, 7/28/03, $7.75, $39.04, 403.82%

ResMed (RMD), 150 shares, 2/4/05, $29.87, $41.72, 39.68%

Satyam Computer Services (SAY), 210 shares, 4/20/07, $25.55, $26.25, 2.73%

Starbucks (SBUX), 50 shares, 1/24/03, $11.40, $26.55, 132.80%

Universal Electronics (UEIC), 155 shares, 2/23/07, $25.24, $36.78, 45.72%

Meridian Bioscience (VIVO), 270 shares,  4/21/05, $7.42, $22.00, 196.54%

Wolverine World Wide (WWW), 200 shares, 4/19/06, $23.55, $28.51, 21.08%

Since my last review on June 7, 2007, I sold 23 shares of Ventana at $76.83, and the rest of the 139 shares of Ventana (VMSI) at $76.502 later the same day on 6/26/07.  On that day I purchased 350 shares of MEDTOX at $28.5534, Bolt hit another appreciation target and I sold 1/7th of my holding (21 shares) at $50.52.  Finally, on 7/5/07, I sold my 210 shares of Gildan at $33.1101 when it hit an (8)% loss after purchase.

Currently I am at 19 positions.  My equity value is $119,962.09, my margin balance is at $56,031.51, giving me a 53.29% margin equity percentage.  As of 7/6/07, I have $33,571.01 in unrealized gains in my account, and with the above trades have taken $3,100.15 in net short-term gains, and $17,824.18 in net long-term gains for a total of $20,924.33 in realized gains for 2007.  I also have paid $2,563.07 in margin interest and have received a total of $272.58 in ordinary dividends and distributions and miscellaneous income.

Please let me know if you have any comments or questions regarding my Trading Account.  Please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Stock Picks Bob's Advice Covestor page, where you can see a third-party analysis of my holdings and performance.  

Bob