Hold Stanley Black & Decker (SWK) Stock Now: Here's Why

We have issued an updated research report on industrial tool maker Stanley Black & Decker, Inc. (NYSE:SWK) on Dec 20. Strengthening tools business as well as expanding product portfolio through meaningful acquisitions will prove beneficial. However, the growth momentum might get restricted by headwinds stemming from rising cost and huge debts, international exposure, industry competition plus global uncertainties.

Stanley Black & Decker carries a Zacks Rank #3 (Hold).

Below we briefly discuss the company’s potential growth drivers and possible challenges.

Factors Favoring Stanley Black & Decker

Strengthening Tools Businesses: We believe Stanley Black & Decker is poised to benefit from its strengthening end markets and growing brand recognition. For Tools & Storage segment, the company anticipates organic revenues to increase in the high-single digit range compared mid-single numbers, expected earlier.

Results will be primarily driven by fortifying construction market in the United States and relatively stable operating conditions in Europe and the emerging markets. Net revenues from DeWalt FlexVolt are anticipated to be approximately $200 million. Also, in the quarters ahead, benefits from Newell Tools and Craftsman acquisitions will boost the segment’s result. By the second half of 2018, the Craftsman products will be available in Lowe’s retail stores.

Inorganic Initiatives Drive Growth Opportunities: Acquired assets have over time contributed to Stanley Black & Decker’s expansion. In the first nine months of 2017, the company’s business acquisitions (net of cash) amounted to $2,582 million. In this regard, the buyouts of the tools business of Newell Brands known as Newell Tools as well as Craftsman tool brand from Sears Holdings are worth mentioning. These takeovers were completed in March 2017.

The company anticipates Newell Brands to strengthen its tools business through deeper penetration into markets worldwide while the Craftsman brand will likely complement its global tools and storage brands as well as open new business opportunities, especially in the lawn and garden end-markets.

Also, divestment of non-core businesses has proven beneficial over time. In February, the company sold a majority portion of its Mechanical Security businesses to dormakaba.

Shareholders’ Return: Stanley Black & Decker has a solid history of returning value to its shareholders. The company paid cash dividends of approximately $267.9 million and repurchased common shares worth $16.2 million for treasury in the first nine months of 2017. Notably, the quarterly rate was hiked by 8.6% in July this year.

In the years ahead, the company wishes to follow its 50/50 capital allocation strategy of acquisitions as well as reward shareholders. Dividend payout is predicted to be 30-35% in the long run.

We believe anticipated growth in earnings, a solid cash flow and a favorable payout ratio will ensure healthy dividend payments by the company going forward.

Healthy ’17 Guidance & Long-Term Targets: Stanley Black & Decker anticipates improving organic revenues (predicted to grow 6% year over year), operational excellence and synergistic benefits from acquired assets to be gainful in 2017. Banking on these aspects, the company has increased its earnings forecast to $7.33-$7.43 per share from the previous projection of $7.18-$7.38. The revised guidance represents year-over-year growth of 13-14%.

By 2022, Stanley Black & Decker aims at generating revenues of approximately $22 billion while revenue rise is predicted at 10-12% (CAGR) range including organic sales growth of 4-6% and acquisition revenues of roughly $6-$8 million. Earnings per share are forecast to grow 10-12% or roughly 6-8%, excluding buyouts. Healthy segmental performance is anticipated with Industrial revenues of $5-$6 billion, Tools & Storage revenues of $12-$14 billion and Security revenues in the $3-$4 billion range.

Over the last six months, shares of Stanley Black & Decker have yielded 18.9% return, outperforming the gain of 15.8% recorded by the industry it belongs to.



Factors Working Against Stanley Black & Decker

Rising Costs & Huge Debt Level: Stanley Black & Decker is suffering the perils of escalated costs and expenses. In the first nine months of 2017, the company’s cost of sales increased 9.6% year over year while selling, general and administrative expenses grew by 12.7%. We believe, if unchecked, rising costs and expenses can hurt the company’s margins in the quarters ahead. Also, a high-debt level can lead to heightened financial obligations, posing serious threats to the company’s financial health. Exiting the third quarter, the company’s long-term debt was approximately $3,818 million.

Threat From Industry Competition: Stanley Black & Decker faces stiff competition across all business segments from companies offering similar products and services or those producing different items for same uses.

Companies operating in the same industry include Kennametal Inc. (NYSE:KMT) , Actuant Corp. (NYSE:ATU) and Lincoln Electric Holdings, Inc. (NASDAQ:LECO) .

Adversaries Emerging from Global Uncertainty: End markets served by Stanley Black & Decker are highly susceptible to volatile global economic conditions. Also, lower level of industrial activities and difficult housing market conditions in the countries where the company operates will adversely impact its sales, earnings and cash flow.

Also, business expansion in foreign nations has exposed the company to risks emanating from adverse movements in foreign currencies and geo-political issues.

Other Headwinds: Realization of synergies drawn from acquisitions is highly dependent on Stanley Black & Decker’s ability to successfully integrate these within the specific time frame. Any failure in prosperous consolidation will affect the company’s future growth prospects. Moreover, the company remains vulnerable to price fluctuations of raw materials procured from suppliers both in the United States and the international markets.

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