Stanley Black & Decker's Growth Prospects Solid, Runs Risks

We have issued an updated research report on Stanley Black & Decker, Inc. (NYSE:SWK) on Jun 29, 2016. The $16 billion company is engaged in manufacturing tools and engineered security solutions. The company offers solid long-term growth potential, but certain near-term risks might restrict its momentum.

Below we briefly discuss Stanley Black & Decker’s tailwinds and headwinds.

Growth Drivers

Product & End-Market Diversification: Stanley Black & Decker seems well-positioned to benefit from its diversified and advanced product portfolio. Its Security segment provides an extensive suite of mechanical and electronic security products and systems, along with a variety of security services.

The Industrial segment offers professional industrial and automotive mechanic tools and storage systems, engineered healthcare storage systems, hydraulic tools and accessories, plumbing, heating and air conditioning tools, assembly tools and systems, and specialty tools. The Tools & Storage segment manufactures and markets hand tools, consumer mechanical tools, storage systems, pneumatic tools and fasteners.

The company serves a vast clientele in various end-markets including retailers, educational, financial and healthcare institutions as well as commercial, governmental and industrial customers.

Growth Strategies & Targets: Stanley Black & Decker has significant long-term growth potential, backed by its strategy of shifting its business portfolio toward favored growth markets. For 2015−2018, the company targets to achieve approximately 10−12% revenue growth, including organic revenue growth of 4−6%. Operating margin is expected to be roughly 16%, while earnings per share are predicted to grow in mid-teens.

For 2016, Stanley Black & Decker increased its earnings per share guidance to $6.20−$6.40 and organic revenue growth forecast to 3−4% range. On a segmental basis, organic revenues are projected to increase in mid-single digit range for Tools & Storage segment and in low-single digits for Security segments. For the Industrial segment, organic revenue is predicted to be relatively flat.

Shareholders’ Return: Stanley Black & Decker has been consistently rewarding its shareholders with dividend payments and share buybacks. Over the long run, the company wishes to follow its 50/50 capital allocation strategy of acquisitions as well as reward its shareholders. Dividend payout is predicted to be 30–35% in the long run.

Near-Term Headwinds

Risks Associated with International Operations: International expansion of businesses has exposed Stanley Black & Decker to risks arising from foreign currency translations and other geopolitical issues. Forex losses negatively impacted the company’s top-line in first-quarter 2016 and such influences are likely to continue in the quarters ahead.

Relation to Global Uncertainties: Stanley Black & Decker is highly susceptible to global economic conditions and level of industrial activities in the U.S. In first-quarter 2016, macro headwinds played spoilsport for the U.S. based machinery companies. Industrial production in the U.S. declined 2.2% year over year in the quarter. Such negatives adversely influenced the company’s sales, earnings and cash flow.

Other Headwinds: Stanley Black & Decker is also exposed to risks arising from stiff industry rivalry from both larger and smaller companies that offer same or similar products and services, or those producing different products suitable for the same use. Also, high debt increases the company’s financial obligations and hence, might prove detrimental to its profitability.

Conclusion

Stanley Black & Decker currently carries a Zacks Rank #3 (Hold). We believe the above-mentioned pros and cons clearly justify the company’s investment value.

However, there are certain stocks in the machinery industry that have been performing better than Stanley Black & Decker and have gained high investment value. They include Kadant Inc. (NYSE:KAI) , Nordson Corp. (NASDAQ:NDSN) and Luxfer Holdings PLC (NYSE:LXFR) . While Kadant and Nordson Corp. sport a Zacks Rank #1 (Strong Buy), Luxfer Holdings carries a Zacks Rank #2 (Buy).

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