Stanley Black (SWK) Down 5.8% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Stanley Black & Decker, Inc. (NYSE:SWK) . Shares have lost about 5.8% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Stanley Black Beats Q2 Earnings & Sales, Ups '17 View

Stanley Black & Decker reported impressive results for second-quarter 2017, with positive earnings and sales surprises of 2.6% and 1.9%, respectively. Earnings, excluding acquisition related charges and others, of $2.01 per share topped the Zacks Consensus Estimate of $1.96. It also surpassed the year-ago quarter tally of $1.84 by 9.2%.

The company's organic sales grew roughly 6% as 8% gain from volume growth was partially offset by 1% negative price impact and 1% adverse impact of foreign currency translation. In addition to organic growth, acquisition gains were 7% while divestitures had negative 3% impact. Combining these impacts, net sales in the quarter jumped 10% year over year to $3.229 billion. Also, sales were above the Zacks Consensus Estimate of $3.17 billion.

Segmental Revenues: Stanley Black & Decker reports revenues under three market segments. A brief discussion on the segments' quarterly results is provided below:

Tools & Storage generated revenues of $2,259.5 million, up 17% year over year and represented 70% of net revenue in the quarter. Volume growth added 9% to sales growth while acquisitions had a positive 11% impact. These were partially offset by negative impacts of 1% from foreign currency translation, 1% from price and 1% from divestitures.

Industrial segment's revenues, accounting for roughly 15.4% of net revenue, came in at $496.3 million, up 7.2% year over year. The growth was triggered by volume gains of 9%, partially offset by adverse currency impact of 2%.

Revenues from Security, roughly 14.7% of net revenue, decreased 11.9% year over year to $473.7 million. Favorable price impact of 1%, acquisition gain of 2% and volume gain of 1% were more than offset by 2% negative impact of forex losses and 14% negative impact of divestitures.

Margins: In the quarter, Stanley Black & Decker's cost of sales grew 10.4% year over year, accounting for 61.7% of quarter's net sales versus 61.5% in the year-ago quarter. Gross margin declined 20 basis points (bps) to 38.3% as benefits from volume growth and improved productivity was offset by adverse impacts of price, commodity inflation and currency.

Selling, general and administrative expenses increased 9.5% year over year while as a percentage of revenues, it dipped 10 bps to 22.6%.

Balance Sheet & Cash Flow: Exiting the second quarter, Stanley Black & Decker had cash and cash equivalents of $539.5 million, above $378 million in the previous quarter. Long-term debt (net of current portions) was roughly flat at $3,817.4 million.

In the quarter, Stanley Black & Decker generated net cash of $256.5 million from its operating activities, decreasing 48.3% year over year. Capital spending totaled $122.2 million versus $78.7 million in the year-ago quarter. Free cash flow was $134.3 million compared with $417.7 million in the year-ago quarter.

During the quarter, the company paid cash dividends of approximately $86.5 million and repurchased shares worth $2.1 million.

Outlook: For 2017, Stanley Black & Decker increased its earnings forecast to $7.18-$7.38 per share from the previous projection of $7.08-$7.28, primarily on the back of benefits accrued from higher organic revenue growth, operational excellence and acquired assets. Also, the revised guidance represents year-over-year growth of 10-13%.

Compared with its previous guidance of earnings accretion in the range of $0.45-$0.55 per share, incremental organic revenue growth is likely to contribute additional $0.10 per share to earnings.

The company reaffirmed projections of commodity inflation in the range of $50-$55 million and forex headwinds of $50 million (both resulting in a negative impact of $0.50-$0.55 per share).

Free cash flow conversion is predicted to be 100%.

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 segment. For the Industrial segment, organic revenues are predicted to be relatively flat year over year.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter.

Stanley Black & Decker, Inc. Price and Consensus

VGM Scores

At this time, the stock has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. Following the exact same course, the stock was allocated also a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.