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Black & Decker
Forecasts
Since the merger with Stanley, Black and Decker has seen a steady increase in its revenues, gross profit and net income. The different elements of the new company are still being integrated, underperforming divisions are being shed, and synergies between the different components are still being developed. As the company continues to make internal improvements, it can expect that it will continue to grow both its top and bottom lines. It is reasonable to expect that over the next 2-3 years, ongoing internal improvements will help to improve margins, all other factors being equal. The post-merger improvements in the percentage of SGA expenses to revenue should continue in the short-run, albeit at a slower pace. Likewise, internal factors are likely to be responsible for at least a modest growth in income, as marketing synergies in particular emerge.
External factors are also critical to the forecast. The company expects to continue its strong growth overseas, in particular the double-digit growth in Asia, Europe and Latin America. In addition, the forecast for the U.S. housing market and economy overall is moderately positive going forward. The Congressional Budget Office was predicting a recession given the "fiscal cliff," but averting that change in fiscal policy to some extent preserves an earlier forecast of slow GDP gains in the 2-3% range for the coming years. It is important to remember, however, that much of Black & Decker's product line is sold for the construction of new homes or the renovation of old ones. The state of the housing market, therefore, is critical to the forecasting process. In 2012, the U.S. housing market had its best year since 2006 and the expectation is that this trend will continue.As a result, Black & Decker's revenue gains may well be better than the gains in the general economy. Such a prediction also fits well with the volatility implied in the company's beta of 1.48. With this information, an assumption of revenue increases of 3.5% growth over the next five years is not unreasonable. The company is assumed to have the capability to continue to lower its expenses as a percentage of revenue, but the assumption will be that current rates will hold. It is also assumed that the post-merger tax rates will hold, as will the post-merger capital structure.
The following performance measures outline the forecast for Black & Decker over the coming five years (and including the 2011 fiscal year as a reference point):
PERFORMANCE MEASURES
2011
2012
2013
2014
2015
2016
RETURN ON ASSETS
6.00%
5.27%
5.66%
6.02%
6.35%
6.65%
RETURN ON EQUITY
10.00%
12.40%
13.33%
14.18%
14.95%
15.66%
NET MARGIN
7.45%
8.27%
9.07%
9.84%
10.59%
11.31%
TIMES INTEREST EARNED
6.0
6.8
7.7
8.6
9.5
10.4
CURRENT RATIO
1.32
1.32
1.32
1.32
1.32
1.32
AVERAGE COLLECTION
55 days
55 days
55 days
55 days
55 days
55 days
The forecasted income statement is also included, based on the growth assumption noted above of 3.5% revenue growth with stable cost growth.
2011
2012
2013
2014
2015
2016
Revenue
10190
10547
10916
11298
11693
12103
COGS
SGA Exp
Other Operating Exp
Operating Income
Tax
79
82
85
87
91
94
Net Income
The capital structure is assumed to be the same for the next five years, with current items growing in line with revenues and adjustments made to the long-term debt in order to account for the difference. At present, there are no major expected.....