Connecticut-based Stanley Black & Decker (SWK, Financial), a $21.8 billion tools and accessories company, delivered 7.7% year-over-year revenue growth to $6.04 billion and an impressive 45% profit growth to $670 million in the first half of the year (11% margin vs. 8.2% in the same period last year).
Although costs and expenses – including restructuring charges among others –Â rose 4.3% to $5.2 billion, the company still reported higher profitability in the period.
Stanley Black & Decker also raised its 2017 full year earnings-per-share guidance range to $8.05 to $8.25 (from $7.95 to $8.15). At midpoint, this would indicate 25.2% growth from its 2016 year figure.
“Stanley Black & Decker continued to generate impressive results in the second quarter. Each of our businesses contributed to 7% organic revenue growth and the company posted a strong 15.7% operating margin rate. Of particular note was the performance of Tools and Storage and Engineered Fastening, which generated organic growth of 8% and 6%, respectively, as well as Security North America, which built on the positive momentum of last quarter to deliver 4% organic growth. Both of our smaller Industrial businesses, Hydraulic Tools and Oil & Gas, also contributed with double-digit organic growth.
"Supplementing the solid organic performance, our recent acquisitions added seven points of revenue growth. The integrations of both Newell Tools and the Craftsman brand are in full swing and on target. I am pleased with our team's solid execution and with our continued efforts to become known as a leading innovator, deliver top-quartile financial performance and elevate our commitment to social responsibility."Â –Â James M. Loree, president and CEO
Ă‚
Despite the positive outlook and recognized performance, shares of Stanley Black & Decker dropped 2.13% post-earnings release.
Valuations
Despite its recent all-time highs, Stanley Black & Decker remained undervalued compared to its peers having had a trailing price-earnings (P/E) ratio of 18.2 times vs. the industry median of 23.1 times, a price-book (P/B) ratio of 3.2 times vs. 1.9 times and a price-sales (P/S) ratio of 1.9 times vs. 1.3 times (GuruFocus data).
The company also had a trailing dividend yield of 1.61% with a 29% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 1.8 times and 19.6 times.
Total returns
Stanley Black & Decker outperformed the broader Standard & Poor's 500 index in the past decade with 10.13% (annualized) total returns vs. the index’s 7.3%. So far this year, the company has provided 25% total returns vs. the index’s 11.9%.
Stanley Black & Decker
According to filings, Stanley Black & Decker Inc. was founded in 1843 by Frederick T. Stanley and incorporated in Connecticut in 1852. In March 2010, the company completed a merger with Black & Decker Corp., a company founded by S. Duncan Black and Alonzo G. Decker and incorporated in Maryland in 1910.
Stanley Black & Decker is a diversified global provider of hand tools, power tools and related accessories, mechanical access solutions (i.e., automatic doors and commercial locking systems), electronic security and monitoring systems, health care solutions, engineered fastening systems and products and services for various industrial applications.
In 2016 approximately 52% of the company’s annual revenues were generated in the U.S., with the remainder largely from Europe (23%), emerging markets (16%) and Canada (4%).
In October 2016 Stanley Black & Decker announced an agreement to acquire Newell Tools, which includes the highly attractive industrial cutting, hand tool and power tool accessory brands Irwin® and Lenox®, for $1.95 billion in cash.
In December 2016 the company announced it had reached an agreement to sell the majority of its mechanical security businesses to Dormakaba for $725 million in cash.
In January the company announced an agreement to purchase the Craftsman brand from Sears Holdings for total expected cash payments of approximately $900 million on a discounted basis. The acquisition, which is expected to close in 2017, grants Stanley Black & Decker the rights to develop, manufacture and sell Craftsman®-branded products in non-Sears Holdings channels.
Stanley Black & Decker’s operations are classified into three reportable business segments: Tools & Storage, Security and Industrial.
Tools & Storage
The Tools & Storage segment is comprised of the Power Tools and Hand Tools, Accessories & Storage (HTAS) businesses (1).
The Power Tools business includes both professional and consumer products. Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, concrete and masonry anchors. Consumer products include corded and cordless electric power tools sold primarily under the BLACK+DECKER brand, lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, edgers and related accessories and home products such as hand-held vacuums, paint tools and cleaning appliances.
Revenue in the first half for the Tools & Storage business jumped 13% year over year to $4.1 billion (68% of sales) and registered a profit margin of 16% compared to 17% in the year prior period.
Security
The Security segment is comprised of the Convergent Security Solutions (CSS) and Mechanical Access Solutions (MAS) businesses.
The CSS business designs, supplies and installs electronic security systems and provides electronic security services, including alarm monitoring, video surveillance, fire alarm monitoring, systems integration and system maintenance. Purchasers of these systems typically contract for ongoing security systems monitoring and maintenance at the time of initial equipment installation.
The business also sells health care solutions, which markets asset tracking, infant protection, pediatric protection, patient protection, wander management, fall management and emergency call products.
The MAS business sells automatic doors, commercial hardware, locking mechanisms, electronic keyless entry systems, keying systems, tubular and mortise door locksets.
Revenue in the security business fell by 8.6% year over year to $952 million (16% of sales) and had margins of 11% vs. 12% in the year prior period.
According to filings, the fall in security revenue was a result from the sale of Stanley Black & Decker majority of the mechanical security businesses.
Industrial
The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses.
The Engineered Fastening business primarily sells engineered fastening products and systems designed for specific applications. The product lines include stud welding systems, blind rivets and tools, blind inserts and tools, drawn arc weld studs, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners and high-strength structural fasteners.
The Infrastructure business consists of the Oil & Gas and Hydraulics businesses. The Oil & Gas business sells and rents custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines and provides pipeline inspection services. The Hydraulics business sells hydraulic tools and accessories.
In the first half, revenue in the industrial business grew 4.8% year over year to $968.9 million (16% of sales) and had margins of 19% vs. 17% in the year prior.
Sales and profits
On a three-year average, Stanley Black & Decker’s revenue rose by 1.21%, profit increased by 25.3%, and profit margin was 7.7%.
Cash, debt and book value
As of July, Stanley Black & Decker had $539.5 million in cash and cash equivalents and $4.41 billion in debt with debt-equity ratio 0.57 times vs. 0.72 times in the year prior. Overall equity rose by $1.9 billion year over year while debt increased by $237 million.
Of the company’s $19.3 billion assets 62%Â were identified as goodwill and intangibles while book value grew 31.7% year over year to $7.71 billion.
Cash flow
Despite the high profits recognized in the first half, Stanley Black & Decker’s cash flow from operations dropped by 72.5% year over year to $110.9 million as a result of higher cash outflow in its pretax loss (gain) on sales of businesses and changes in working capital.
Capital expenditures were $186.9 million leaving the company with (-)$76 million free cash outflow compared to $259.7 million in the year prior. Nonetheless, Stanley Black & Decker allocated $188.8 million in dividends and repurchases.
The company also took in $561.3 million in borrowings net repayments.
In the past three years, Stanley Black & Decker allocated an accumulated $949 million in capital expenditures, generated $3 billion in free cash flow, raised $653 million in share issuances, reduced overall debt by $704 million (net any issuances and other activities) and provided $2.03 billion in shareholder payouts representing 69.4% free cash flow payout ratio.
Conclusion
Stanley Black & Decker’s decision to sell its mechanical security business for $725 million last year certainly did not reflect on the company’s recent results. This diversification could have been prudently timed as the company’s security business (16% of sales) has been in a decline in the past two years, on average, albeit having low teen profit margin figures.
The company’s industrial business (also 16% of sales), on the other hand, has exhibited a turnaround in the recent six months compared to its weak and declining revenue in the past two fiscal years.
Meanwhile, Stanley Black & Decker has continuously enhanced its Tools & Storage and now having generated 68% of company sales.
It did appear that Stanley Black & Decker carried a modestly leveraged (0.57 times debt-equity ratio) while having more than half (62%) of its assets identified as goodwill and intangibles. All the while, the company has kept its payout a little more than half of its free cash flow in recent years.
Analysts have an average price target of $156.87 per share vs. $140.28 at the time of writing. Assuming a five percentage revenue growth rate applied with past P/S average followed by a 25% margin indicated a figure of $97.6 per share.
In summary, Stanley Black & Decker is a hold with a target of $150 per share.
Notes
(1) Company filings
The HTAS business sells measuring, leveling and layout tools, planes, hammers, demolition tools, knives, saws, chisels and industrial and automotive tools. Power tool accessories include drill bits, router bits, abrasives and sawblades. Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products.
Disclosure: I do not have shares in any of the companies mentioned.
