We have issued an updated research report on Stanley Black & Decker, Inc.SWK on Aug 27.
This industrial tool maker currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $21.6 billion.
Let's delve deeper and discuss the company's potential growth drivers and probable headwinds.
Factors Favoring Stanley Black & Decker
Financial Performance and Outlook: Stanley Black & Decker delivered better-than-expected results in the last four quarters. Average earnings surprise is a positive 8.93%. Notably, the company's earnings in the second quarter of 2018 were $2.57, surpassing the Zacks Consensus Estimate of $2.04 by 26%. Moreover, earnings increased 27.3% year over year on the back of healthy segmental results and synergistic gains from acquired assets, partially offset by the adverse impacts of commodity inflation.
For 2018, Stanley Black & Decker anticipates adjusted earnings per share of $8.30-$8.50 (guidance maintained), above $7.45 recorded in 2017. Organic sales are predicted to grow 7%. Further, acquired assets and productivity enhancement initiatives will benefit the company's bottom line.
The Zack Consensus Estimate for the company's earnings is currently pegged at $8.39 for 2018 and $9.41 for 2019, reflecting year-over-year growth of 12.6% and 12.2%, respectively. Earnings estimates for third-quarter 2018 are pegged at $2.02, representing growth of 3.6% over the year-ago quarter.
By 2022, Stanley Black & Decker aims at generating revenues of approximately $22 billion, including organic sales growth of 4-6%. Earnings per share are forecasted to grow 10-12%.
Strengthening Portfolio Through Buyouts: Acquisition is one of the favored growth options for Stanley Black & Decker. The company is benefiting from its Irwin, Lenox and Craftsman branded-products. Both Irwin and Lenox were added to its portfolio through Newell Tools buyout in March 2017, Craftsman products were added through the Craftsman acquisition in the same month. Moreover, the company strengthened its Engineered Fastening business with the acquisition of the industrial business of Nelson Fastener Systems in April 2018. It's worth noting here that acquired assets contributed 3% to sales growth in the second quarter of 2018.
Recently, Stanley Black & Decker has agreed to acquire IES Attachments - manufacturer of attachment tools for off-highway applications. The buyout will be modestly accretive to earnings in 2019 while add 25-30 cents per share by the third year of the completion.
By 2022, Stanley Black & Decker anticipates acquisition revenues to be approximately $6-$8 million.
Rewards to Shareholders: Stanley Black & Decker believes in rewarding its shareholders handsomely. It used $189.1 million for paying dividends and $212.7 million for share buybacks in the first half of 2018. In July 2018, the company hiked its quarterly dividend rate by 4.8% while completed $300-million share buybacks. Furthermore, the company has an option to repurchase 3.2 million shares by March 2021.
For 2018, Stanley Black & Decker anticipates that the buyback of $200 million worth of shares in the second quarter will add 20 cents to earnings per share. In the long run, the company wishes to follow its 50/50 capital-allocation strategy of acquisitions and reward shareholders. Dividend payout is predicted to be 30-35%.
Factors Working Against Stanley Black & Decker
Rising Costs an Impediment, Share Price Performance Poor: Stanley Black & Decker is grappling with the adverse impacts of rising cost of sales and expenses. A year-over-year increase of 14.7% in the cost of sales, and 6.1% in selling, general and administrative expenses were recorded in the second quarter of 2018. Gross margin fell 210 basis points (bps) and operating margin declined 110 bps.
For 2018, commodity inflation - in steel, base metals, batteries and others (including resin, components, fuel and packaging) - is predicted to be roughly $205 million, higher than the original guidance of $150 million and April forecast of $180 million. Moreover, tariffs related to Section 232 and Section 301 will have an adverse impact of $35 million in 2018, resulting in 30 cents per share of earnings dilution.
In the past month, shares of Stanley Black & Decker have decreased nearly 2.8%, underperforming 1% decline recorded by the industry .
Segmental Issues and Forex Woes: For the Industrial segment, organic sales in 2018 will be adversely impacted by headwinds related to lesser oil and gas projects, and the automotive system rollovers. Further, the segment's margins (predicted to be down year over year) will suffer from Nelson Fastener buyout, and the adverse impact of commodity inflation and tariffs.
The Tools & Storage segment's margins will decline year over year due to commodity inflation and forex woes, while initiatives to transform business structure will result in a decline in Security margin.
Moreover, forex woes are predicted to have an adverse 40 cents per share impact on earnings in 2018.
Huge Debt Raises Concerns: Stanley Black & Decker's highly leveraged balance sheet can be concerning. Long-term debt balance was $2,831.2 million at the end of the second quarter of 2018 while its total debt to total equity was at 46.5%, reflecting an increase from 45.1% at the end of the first quarter and 46.1% at the end of 2017.
For 2018, high debt levels to address working capital requirements and higher interest rates will result in an increase in interest expenses. However, the adverse impact from these is predicted to be offset by lower other expenses (net).
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Altra Industrial Motion Corp. AIMC , Chart Industries, Inc. GTLS and Barnes Group Inc. B . While Altra Industrial Motion sports a Zacks Rank #1 (Strong Buy), both Chart Industries and Barnes Group carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
In the past 60 days, earnings estimates for each of these stocks improved for the current year and the next year. The average positive earnings surprise for the last four quarters was 4.01% for Altra Industrial Motion, 29.36% for Chart Industries and 6.88% for Barnes Group.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportStanley Black & Decker, Inc. (SWK): Free Stock Analysis ReportBarnes Group, Inc. (B): Free Stock Analysis ReportAltra Industrial Motion Corp. (AIMC): Free Stock Analysis ReportChart Industries, Inc. (GTLS): Free Stock Analysis ReportTo read this article on Zacks.com click here.