The origins of Stanley Black & Decker Inc. (SWK, Financial) began in 1843 when Frederick Stanley started a small shop in Connecticut to manufacture bolts, hinges and other hardware from wrought iron. In 1910, Duncan Black and Alonzo Decker started their shop in Maryland, and six years later obtained the world’s first patent for a portable power tool. Over the years, the two companies amassed a comprehensive family of iconic brands and products. In 2010, they came together to form Stanley Black & Decker, a leading global diversified manufacturer of power tools, hardware and industrial products.
The company has been public since 1985, generated over $15 billion in revenue in 2021 and currently has a market capitalization of $14.9 billion.
Segments
The Tools & Storage segment is comprised of the power tools, hand tools, accessories and storage and outdoor power businesses. Annual sales in this segment were $12.8 billion in 2021, accounting for 82% of total company revenue. The PTG business includes both professional and consumer products, such as professional grade corded and cordless electric power tools and equipment like drills, impact wrenches and drivers, grinders, saws, routers and sanders. The consumer products are sold primarily under the Black & Decker brand.
The HTAS business sells hand tools, power tool accessories and storage products. The Outdoor business primarily sells corded and cordless electric lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, pressure washers and related accessories. Professionals and consumer brands include Dewalt, Cub Cadet, Black & Decker, Craftsman, Troy-Bilt and Hustler.
The Industrial segment is comprised of the engineered fastening and infrastructure businesses. Annual revenue in this segment was $2.5 billion in 2021, representing 16% of the company’s total revenue.
The Engineered Fastening business primarily sells highly engineered components such as fasteners, fittings and various engineered products, which are designed for specific application across multiple verticals.
Financial review
The company reported disappointing second-quarter results on May 28. Net sales increased 16%, which was almost entirely due to acquisitions. Gross margins decreased 800 basis points and operating income decreased a stunning 35%. Most of corporate America sounds like a broken record as these margin declines for Stanley Black & Decker are being blamed on inflation, rising interest rates, supply chain issues and significantly slower demand in late May and June.
Free cash flow swung to a negative position at -$590 million compared to positive free cash flow $339 million in the prior-year quarter. The company’s debt ballooned to $11.2 billion at the end of the second quarter from $6.6 billion at the end of 2021, largely due to the untimely large share repurchase activity.
Valuation
The company dramatically reduced annual guidance for adjusted 2022 earnings per share from the range of $9.50 to $10.50 to $5 to $6 due to lower demand and ongoing cost pressures. Consensus analyst estimates were quickly reduced to the $5.66 range for the year. Based on the earnings estimates, Stanley Black & Decker is selling at 17 times earnings. If the company can experience margin recovery in 2023 and estimates hold up at $10.52, the company is trading at only 9 times next year's earnings estimates.
Using $10.52 as the starting point and growing at only 5% over the next 10 years, the GuruFocus DCF calculator creates a value close to $142, or approximately 33% upside.
The company is a longtime dividend achiever and pays an annualized dividend of $3.20, which equates to a 2.72% dividend yield.
Guru trades
Gurus who have purchased Stanley Black & Decker shares recently include John Rogers (Trades, Portfolio) and Ray Dalio (Trades, Portfolio). Gurus who have reduced their holdings include Robert Olstein (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Conclusion
Stanley Black & Decker appears to be in a holding position as its current earnings and margin profile do not reflect the long-term growth capabilities of the company. If these inflation and supply chain issues do turn out to be transitory, then the company is poised for solid long-term gains based on today's share price.
