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Robert Stephens, CFA
Robert Stephens, CFA
Articles (139) 

Why Stanley Black & Decker Has Recovery Potential

The company could generate improving stock performance

January 24, 2019 | About:

Strategy changes could boost Stanley Black & Decker Inc.'s (NYSE:SWK) financial prospects. The company is seeking to reposition its brands as it aims to increase market share. Further investments in e-commerce are expected to strengthen its position in a variety of regions.

Synergies from past acquisitions are expected to improve its revenue growth outlook. The application of new technology could strengthen its financial performance and help to protect the company from uncertain operating conditions.

Although the external challenges experienced in fiscal 2018 are forecasted to continue in 2019, the company expects to offset heightened costs through its adaptable business model. Having declined 30% in the last year versus a 7% fall in the S&P 500, the stock could have recovery potential.

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Strategy

An evolving strategy could catalyze the company’s stock performance. It expects to see benefits in 2019 from the rollout of the Craftsman brand, which is the largest product program in its history. It is on track to generate $1 billion in revenue growth by 2021, which is seven years earlier than expected. Strong user acceptance is boosting sales, having achieved a 4.6-star rating across over 1,000 products in Lowe’s (NYSE:LOW) and Ace Hardware stores.

Stanley Black & Decker is unlocking new opportunities for market share gain through the alignment of its brands across core user groups within the Tradesman and Professional segments. The company is also leveraging its brands with its retail partners. For example, it is in the process of repositioning its Stanley and Stanley FatMax brands in the North American home center channel. The company continues to be the industry leader in e-commerce on a global basis within its key segments. Further investment in e-commerce is expected to strengthen its position and boost sales in both developed and emerging economies.

Growth potential

The company expects to realize revenue synergies from the Lenox-Irwin acquisitions that will represent between $100 million and $150 million of organic sales growth over a multiyear period. It intends to broaden the distribution of its products across the globe. In emerging markets, it is delivering market share gains, with the strength of its brands set to lead to growth that is two to three times the market rate. The MTD partnership includes an option to purchase the remaining 80% of the business in 2021. This is anticipated to increase revenue of $3 billion in the early 2020s, as the company targets total revenue of $22 billion by 2022.

Stanley Black & Decker is aiming to apply modern technology, such as advanced analytics, in order to increase margins. It expects to benefit from pricing and productivity in 2019, with its $250 million cost-reduction program now almost complete. It plans to apply elements of Industry 4.0 later in 2019 as it seeks to buffer its earnings and cash flow from the volatility of market cycles.

Threats

The external operating environment was challenging in 2018. There was pressure from input cost inflation and tariffs, which increased over the course of the year. By the fourth quarter of 2018, the cost of those challenges had risen to $370 million from initial estimates of $150 million, which were made earlier in the year. The company expects the same difficulties to persist in 2019, with severe market contractions in Turkey and Argentina likely to continue.

Even with difficult operating conditions, Stanley Black & Decker delivered 9% growth in adjusted earnings per share in fiscal 2018. Through adapting to unexpected threats, it was able to offset all but $50 million of the $370 million costs as a result of cost and price management. It intends to leverage its SFS 2.0 operating system in order to counter the impact of external risks in fiscal 2019. Strong growth in a number of key markets, including Brazil, Mexico, Russia and India, is expected to offset weakness elsewhere.

Outlook

An updated strategy could improve the financial prospects of Stanley Black & Decker. The rollout of the Craftsman brand and the impact of recent acquisitions could enhance its stock price performance. Investment in e-commerce may also strengthen its position in key growth markets.

The application of new technology is expected to improve margins. A repositioning of its brands may also boost its competitive advantage.

Although operating conditions may remain challenging in 2019, Stanley Black & Decker's adaptability means that cost and price changes could offset them. Having underperformed the S&P 500 in the last year, the stock could offer turnaround potential.

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