Positive long-term outlook noted for Baldor Electric

A recent report suggests a bright future for Fort Smith-based Baldor Electric Co. despite the company’s current financial struggles.

Nashville-based Avondale Partners noted the following in a Feb. 18 research report on Baldor: “We believe investors should not lose sight of the longer term story for (Baldor), which is about the continued leveraging of the sizable Reliance/Dodge acquisition opportunities, international expansion, de-leveraging on strong free cash flow and a steadied progression toward higher efficiency motors.”

However, the short term is not a pretty picture.

Baldor survived 2008 with a 6% increase in net income, but was hit with a 20% net income decrease in the fourth quarter of 2008. The company announced Dec. 15 it would eliminate 900 jobs from its workforce, with the reductions coming from normal attrition rather than job cuts. Baldor officials estimated then that cost savings from the employee reduction would be about $60 million. The company, which operates in 28 plants in five countries, employed about 8,300 as of June 2008.

Baldor’s shares (NYSE: BEZ) reflect the tumultuous year for the company and the global economy. During the past 52 weeks, the share price has ranged from a $39.90 high to a $10.71 low.

“We expect 2009 to be a challenging year,” McFarland advised in a fourth-quarter earnings release.

Kristine Kubacki, a senior analyst with Avondale, has given the company’s shares a “market outperform” rating. She is confident Baldor’s $1.8 billion acquisition of competitor Reliance/Dodge in November 2006 will prove fruitful.

Kubacki is boosting the company’s first quarter per-share earnings estimate from 32 cents to 40 cents. However, Kubacki remains conservative on 2009 performance, and has dropped her 2009 per-share earnings estimate for Baldor to $1.82 from $1.95. Baldor recorded fiscal year 2008 per-share earnings of $2.15.

Following are a few categorical comments Kubacki noted in her Feb. 18 report.

REPORT SUMMARY
• “After neatly tucking in an acquisition that more than doubled the size of the company, we believe this well-managed company still has plenty of opportunities to harvest both internally (operating synergies) and externally (a broader product portfolio with broader appeal).”

• “Despite higher debt levels as a result of the acquisition, we view the company’s ability to generate strong free cash flow and its record of lowering debt faster than anticipated as comfort to investors.”

• “We also believe the weak U.S. dollar, largely untapped Asian market and continued capital investments in commodity exploration drive solid end market demand for BEZ in near to intermediate term.”

DEBT QUESTIONS
• Baldor’s total debt as of Jan. 3 was $1.32 billion. While some see that as no small sum for Baldor, Kubacki is not overly concerned about the company’s ability to manage the debt and its associated covenants.

• “(Baldor) plans to reduce debt by a minimum of $125 million during 2009. The current debt to EBITDA (earnings before interest, taxes, debt and amortization) ratio for Baldor is 3.81 and this ratio needs to be reduced to 3.75 by Dec. 31 2009. Management stated that with the planned debt reduction, cost reduction plans and current sales initiatives that they don’t see 3.75 being difficult to achieve.”

POTENTIAL GROWTH CATALYSTS
• U.S. capital spending drastically rebounds.
“A rebound in the U.S. economic outlook or a faster than anticipated industrial recovery could positively impact Baldor’s core North American market.”

• Asian business accelerates faster than anticipated.
“With the start-up of a new motor plant expected later this year, a faster than anticipated penetration into the (world’s) largest motor market could positively impact Baldor more than currently anticipated.”

POTENTIAL RISKS
• Raw material price.
“The company is dependent on raw materials such as copper, steel and aluminum. If Baldor were unable to offset rapid price increases in raw materials through end market price increases or productivity improvements, it could have a negative impact on Baldor’s earnings.”

• Global recession.
“Baldor’s end markets are cyclical and dependent on both U.S. and international industrial activity. If we were to see a prolonged U.S. slowdown or a significant slowdown in global growth, it could negatively impact Baldor.”
 
• Leverage.
“At 61% debt to capitalization, Baldor remains highly levered. Outside of a severe global recession, we only view this as a risk as the amount of leverage potentially impacts the ability of the company to procure further financing if another need were to arise.”
 
• Start-up challenges.
“Start-up issues at the new Asian motor plant could negatively impact Baldor’s entry into the Asian market.