Let Stanley Black & Decker Help Build Your Portfolio
Stanley Black & Decker (NYSE:SWK) is a company that offers products which are probably in your home right now. As a stock, it has been rebounding ever since a huge drop back in October 2013. In the last year, it is up just 3 percent, but I suspect the stock will move significantly higher.
Before considering buying the stock, you should know how the company operates. The company itself provides power and hand tools, mechanical access solutions, and electronic security and monitoring systems for various industrial applications. It operates in several distinct segments that I want to give you an overview of.
Its Construction & Do-It-Yourself segment provides professional grade corded and cordless electric power tools and equipment, including drills, impact wrenches and drivers, grinders, saws, routers, and sanders, corded and cordless electric power tools, lawn and garden products, and home products; measuring, leveling and layout tools, planes, hammers, demolition tools, knives, saws, and chisels, as well as tool boxes, sawhorses, and storage units. This segment sells its products to professional end users, distributors, and retail consumers.
The company’s Industrial segment offers professional hand tools, power tools, and engineered storage solution products; engineered fastening products and custom pipe handling machinery, joint welding and coating machinery, weld inspection services, and hydraulic tools and accessories.
Its Security segment offers electronic security systems; electronic security services, such as alarm monitoring, video surveillance, fire alarm monitoring, and systems integration and maintenance. It also provides healthcare solutions, which include medical cabinets, asset tracking solutions, infant protection, pediatric protection, patient protection, wander management, fall management, and emergency call products. Finally it offers automatic doors, commercial hardware, locking mechanisms, electronic keyless entry systems, keying systems, and tubular and mortise door locksets.
Now that we have an understanding of the company, why do I think the stock can move higher from here? Well, net sales for its most recent quarter were $2.9 billion, up 1 percent versus the prior year, primarily attributable to pricing, some favorable acquisitions and currency exchange differences. However, the company’s organic growth was negatively impacted by what the company called “unusually weak emerging markets due to economic and political circumstances.” That said, the company reported diluted GAAP earnings per share of $1.37. Excluding special charges diluted earnings were $1.43.
Digging a little deeper some of the underlying metrics improved. For example the gross margin rate for the quarter was 36.5 percent Up 100 basis points from the prior year rate of 35.5 percent. Expenses were 22.8 percent of sales, a 10 basis point decline from last year’s 22.9 percent. Operating margin rate was 13.7 percent, up 110 basis points from last year because the company took steps last quarter to improve profitability and generate operating leverage. Further the tax rate was 23.0 percent, 170 basis points lower than the 2Q13 rate of 24.7 percent. Free cash flow for the quarter inclusive of $35 million of one-time payments was $376 million, a $272 million increase over last year. All in all, it was a fantastic quarter. Chairman and CEO John F. Lundgren stated:
“Our focus is on executing our 2014 operating priorities and our strong second quarter and first half results demonstrate the benefits of initiatives to drive margin expansion and operating leverage through pricing and cost management across the organization. What makes the results even more notable is that we overcame significant headwinds relating to currency, the impact of cold weather on our North American outdoor product business and a continued volatile environment in the emerging markets. Given our encouraging performance thus far, and our visibility into the remainder of the year, we have the confidence to increase our guidance for 2014. Our focus for the balance of 2014 remains on continuing to deliver improved operating performance including both organic growth and margin expansion as well as achieving our previously communicated capital allocation objectives. This will position us well to drive long-term sustainable improvements to the company’s cash flow return on investment.”
Looking ahead, the stock is a solid buy. Further, it has increased its guidance. It sees earnings at 5.38 to $5.48 on aGAAP basis, up from $5.23 to $5.38. On an adjusted basis excluding special charges it sees earnings at $5.50 to $5.60, up from $5.35 to $5.50. That is a huge lift, and should be enough to push the stock over $100 barring a stock market selloff.
Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no intentions to initiate a position in the next 72 hours. He has a tentative buy rating on Stanley Black and Decker and a $107 price target.