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January 07, 2007 – Comments (0)

“Hi Earl.”

“Wax you remember a long time back, like when I’s a kid, they used to have that fella come around sell’n brushes and such?”

“Yea, yea, yea, the Fuller Brush guy.”

“Huh? The Fuller part seems right but I thought the company was the Fuller Bush Company.”

“Why would you think that Earl?”

“Well, one day I walked over to Monty Weldon’s house to see if he wanted to play. I knocked on the door and when he opened it, I could hear all this moan’n and stuff. Monty had a big grin on his face like he just pulled out all the cat’s whiskers or someth’n. When I asked him what all the noise was, he told me that he had just gotten back from look’n for snakes with Petey and had walked in on the Fuller guy giving his Mom the old bushmaster.”

“So you mean that all these years you thought the name of the company was the Fuller Bush Company?”

“Well sure. I mean Monty told me his Mom was excited and that’s why she was moan’n so I just fig’rd she was happy with her new bushmaster, which I guess she was cause that guy used to stop by Monty’s house several times a week. Anyway, I just figured Mrs. Weldon was buying bushes not brushes. Sides, I didn’t know a bushmaster from a pogo stick. Still don’t for that matter.”

“Earl? If she’d been buying bushes didn’t you think she’d have had to plant them, eventually?”

“I asked Monty about that and he told me Harold, that was the Fuller guy, took care of all the bushes that needed plant’n, not just on our street but on several others too. I thought that was a pretty nice thing to do, don’t you Wax?”

“Earl…..? Skip it. So Mrs. Weldon’s bushmaster aside, what does this have to do with anything?”

“Oh, yea. Okay.”

“Well last week I promised Aunt Terlene that I would take King to the groomer. So the other day, I go by and pick King up and head over to over to Palmtown Shopping Center. You been over there lately? They got a new movie house like a auditorium, fancy chairs and….”

“No, I haven’t, but doesn’t Erma’s roommate work there?”

“Sure does and a good thing too, cause when I got a complaint I can just look her up and she takes care of it quick. It’s sorta fun to see her in action. Makes me feel special too.”

“I suppose a quickie from somebody as pretty as Erma’s roommate would make me feel special too Earl, but where is all of this going?”

“Well, after I dropped King off, I went over to Donald’s Roast and Pull for a cup a coffee and some pie. You know Donald’s place don’tcha Wax?”

“Yes Earl, I know the place.”

“So I’m sitt’n at the last counter stool eat’n my pie and such, when these two fellas come in and sit in the booth right next to where I’m sitt’n. They’s talk’n in low tones which a course makes me list’n lots closer.”

“Is this going to take long Earl? I’m scheduled for toe nail removal about now.”

“ Hold your hair Wax, just hold your hair.”

“Lemme see. Where was…oh yea. So these two fellas is sorta whisper’n, which like I said makes me list’n right close, when I hear one of ‘em say they’s gonna try some new grout from a company called Fuller, which made me think back to the Fuller guy from when I’s a kid, which got me to wonder’n if it was the same outfit?”

“Figured you might know someth’n on ‘em there Wax. So here I am.”

“Okay, but why now Earl? I’ve tried to talk you into learning about saving and investing since you graduated high school!”

“Well Wax, just the other day, for no reason at all, it popped into my mind that I was gett’n sorta old, which got me to think’n that I needed to start put’n something back, you know, for when I retire an all.”

“Then when I heard them two fellas talk’n, all them childhood memories come back to me and reminded me that Fuller was a name I’d heard about, and since it was a name I recognized, I thought that it might not be a bad thing to invest in, you know, for in the future.”

“Wow, I’m impressed Earl.”

“I know. It was just that the thought that I could possibly get old was something I didn’t wanna think on. You may need to tell me stuff about save’n up and invest’n and all more’n once, but eventually I’ll get it. I mean I ain’t exactly a maroon Wax.”

“No, no you certainly aren’t a maroon Earl.”

“Okay! You want to know about Fuller? Well here’s what I know. It should be enough to get you started on your own research.”

“The name of the company is H.B. Fuller Company (NYSE: FUL)

…….

Founded in 1887, the company manufactures adhesives, sealants, and coatings used in the manufacture of products ranging from cereal boxes to windows.

The company is organized into two operating segments, Global Adhesives and Full-Valu/Specialty.

Representing almost 70% of the company’s consolidated net revenue, the Global Adhesive business supplies adhesive products for application in various end-markets, including assembly, packaging, converting, non-woven, automotive, graphic arts, and footwear.

The Full-Valu/Specialty business produces and supplies specialty chemical products such as ceramic tile grouts and mortars, powder coatings, liquid paints, consumer caulks and sealants, window sealants and desiccants, and specialty packaging adhesives and consultative solutions.

While I like the stock and overall management seems to be capable, I have to wonder if the analysts aren’t going to punish the company when it announces it’s 2006 earnings, sometime in March.

Analysts are expecting earnings growth for 2006 of 50%, which I think is unrealistic. Should the company fail to meet this arbitrary growth rate, the stock price could get pummeled.

Looking back a bit, the company has consistently maintained a Free Cash Flow rate of 4%, meaning that out of every $1 in sales, $0.04 becomes free cash flow. In addition, the company’s Return on Invested Capital continues to improve, ending 2005 at almost 9%, and the company’s Weighted Average Cost of Capital was down slightly at 4.5%

Currently trading in the $26 range I think the company has a reasonable value in the $50 to $55 range.

For the longer-term investor I would set a buy target at $26 and a sell target at $56. For the shorter-term investor, the stock currently has overhead resistance at $28.25, first support at $25.91, and second support at $23.50.

If you are a hair trigger investor, one that will sell a stock if the wind blows from the wrong direction, the remaining discussion will mean nothing to you, so you may as well go. But thanx for staying with me to this point, I feel honored that I was able to garner so much of your time.

Here’s the deal. During 2006, Fuller acquired the assets of the Roanoke Companies, Inc. a manufacturer and distributor of “pre-mixed” flooring grouts, focusing on the retail home improvement market. Ah yes…the retail home improvement market, the holy grail of holy grails. Fuller now has place to market products that commercial builders won’t even look at.

In addition the company also purchased the assets of Henkel KgaA, a manufacturer of window insulating glass sealants for both the residential and commercial markets. With the purchase of this company, Fuller gets a strong presence in Europe, as well as the advantage of increasing Asian sales, since Henkel as been active in the Asian market for some time.

Also in 2006, Fuller sold off its Powder Coatings business to The Valspar Corporation (NYSE: VAL), and CEO Al Stroucken, who had headed the company since 1998, moved on to pursue other interests.

These events may seem ordinary, just things undertaken in the course of operating a business, and that’s exactly what they are, but at the same time they could adversely affect Fuller’s short term stock price. Short term meaning 6 to 12 months!

Earlier I mentioned that analysts are expecting an increase in 2006 earnings growth of 50%. What happens to stock prices when analysts’ numbers aren’t met, even if they are numbers that seem to be plucked from thin air? Well here’s a hint, they get slaughtered.

The other thing about stock prices, is when the sale of an existing business unit is factored out of earnings, and acquisitions of new companies is factored into earnings, the price of the stock, at least over the very very short term, can be negatively affected.

I believe that buying Fuller at $26 employs a reasonable margin of safety. With that said, and considering additional events that might weigh on the stock price, if investors are not willing to buy additional shares should the stock price warrant, they need to stay away from Fuller.

…….

“Dern Wax. I don’t understand all of what you just said, but at least it’s enough to get me started look’n into Fuller. I think I’ll ask DeAnne if she’ll meet me at the library later, sorta help me out, if you know what I mean.”

“Earl, I may be old but I’m not dead. Trust me…I understand.”

“Damn! I gotta go Wax. I told Aunt Terlene I’d pick King up at the groomers.”

“That’s real nice of you Earl, helping your aunt with her dog.”

“Dog? King ain’t a no dog, King’s Aunt Terlene’s husband. King’s just his nickname.”

“Husband! Then why is he at the groomers?”

“That’s the name of King and Aunt Terlene’s beauty parlor, The Pluck and Groom. I take King over there so he can check on the place or if he needs to tend to problems with the beauticians.”

“Oh, I didn’t realize. Well, where did King come from?”

“Beats me. Just showed up one day…”

“No Earl. I meant how come his nickname is King?”

“You know I asked Aunt Terlene that when I’s a kid. She told me she had met King when he knocked on her door one day, said he was a door-to-door salesman. She sorta got that dreamy look in her eye when she’s tell’n me. Said he was nice, polite, and well mannered.”

“I remember she’s sorta mumbl’n as she’s tell’n me, kinda reliv’n the whole thing I spose.”

“From what I could figure out, King had a real smooth way with folks, especially lady folks, and Aunt Terlene was as a very very single lady. Guess they got to doi’n things you ain’t supposed to talk about which made her happy and him smile, not mention made ‘em wanna keep doi’n them same things. Apparently she’s been call’n him King ever since.”

“Ah…well as long as they’re happy. By the way, what’s his real name?”

“Harold. Why do you ask?”

…….

Wax

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