Stanley Black & Decker Gains From High Demand, Costs Hurt

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We have issued an updated research report on Stanley Black & Decker, Inc.SWK on Jun 26. The company's earnings are projected to grow 10.23% in the next three to five years.

This industrial tool maker currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $20.8 billion.

Let's delve deeper and discuss the company's potential growth drivers and probable headwinds.

Factors Favoring Stanley Black & Decker

Near- and Long-Term Projections: Stanley Black & Decker pulled off better-than-expected results in the last four quarters, with an average positive earnings surprise of 2.92%. Also, the company currently has Earnings ESP of +0.29% for 2018 and +1.01% for 2019. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter . Its earnings estimates of $8.42 for 2018 and $9.43 for 2019 represent year-over-year growth of 13% and 12%, respectively.

For 2018, Stanley Black & Decker anticipates gaining from rising exposure in emerging markets, efforts to innovate products and growing popularity of brands like Craftsman, Lenox, Irwin and DeWalt FlexVolt. Also, benefits from acquired assets, favorable pricing, cost-saving actions and productivity-enhancement initiatives will be a boon for the bottom line. Adjusted earnings in the year are predicted to be $8.30-$8.50 per share, above $7.45 recorded in 2017. Organic sales growth is predicted to be roughly 5%.

By 2022, Stanley Black & Decker aims at generating revenues of approximately $22 billion while revenue rise is predicted at 10-12% (CAGR), including organic sales growth of 4-6% and acquisition revenues of roughly $6-$8 million. Earnings per share are forecasted to grow 10-12% or roughly 6-8%, excluding buyouts. Healthy segmental performance is being anticipated, with Industrial revenues of $5-$6 billion, Tools & Storage revenues of $12-$14 billion and Security revenues of $3-$4 billion.

Solidifying Portfolio Through Acquisitions: Over time, acquired assets have played an important role in expanding Stanley Black & Decker's business. For instance, Newell Tools has been strengthening the company's tools business since it the acquisition in March 2017. Prime brands added via this buyout were Irwin and Lenox. Also, Craftsman acquisition (completed in March 2017) has fortified the company's existing global tools and storage brands. Availability of Craftsman products at Lowe's retail stores will be a boon. Moreover, Nelson Fastener Systems - acquired in April 2018 - has been boosting growth opportunities for the Engineered Fastening business.

Shareholder-Friendly Policy: Rewarding shareholders handsomely through dividend payments and share buybacks have always remained Stanley Black & Decker's priority. In the long run, the company wishes to follow its 50/50 capital allocation strategy for acquisitions and rewarding shareholders. Dividend payout is predicted to be 30-35% in the years ahead.

Factors Working Against Stanley Black & Decker

Weakness in Industrial Segment, Poor Share Price Performance: Performance of the Industrial segment was weak in first-quarter 2018. It recorded flat organic sales result in the reported quarter versus 2% growth registered in the fourth quarter of 2017. For 2018, headwinds related to lesser oil and gas projects, and the automotive system rollovers are predicted to be primarily responsible for a low-single-digit decline in organic sales of the Industrial segment. Also, the segment's margin is estimated to decline year over year in the year.

Stanley Black & Decker' shares plunged 6.5% post the release of first-quarter of 2018 results on April 20, while declined roughly 10.5% in the past three months. The three-month fall is worse than 7.2% decline recorded by the industry it belongs to.

Adversaries Arising From Rising Costs: Stanley Black & Decker is dealing with adverse impacts of rising cost of sales. Notably, the company's cost of sales in the last five years (2013-2017) grew at 2.7% (CAGR). Notably, in first-quarter 2018, cost of sales increased 14.5% year over year. Gross margin in the quarter slipped 120 basis points year over year as commodity inflation of $50 million negated positive impacts of volume growth and improved productivity. We believe that unwarranted rise in costs and expenses will prove detrimental to the company's margins and profitability.

For 2018, the company anticipates commodity inflation in steel, base metals, batteries and others - including resin, components, fuel and packaging - to be approximately $180 million, higher than $150 million predicted earlier. Also, tariff imposition on imports of steel and aluminum is predicted to have an adverse impact of less than $3 million, annually. These two aspects are predicted to lower earnings by 15 cents per share in 2018.

Other Headwinds: Stanley Black & Decker serves customers in various end markets, which are highly susceptible to global economic conditions. Especially, lower level of industrial activities and difficult housing market conditions in the countries, where the company operates, will adversely impact its sales, earnings and cash flow. Also, business expansion in foreign nations has exposed the company to risks, emanating from adverse movements in foreign currencies and geopolitical issues.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Twin Disc, Incorporated TWIN , Actuant Corporation ATU and Graco Inc. GGG . While both Twin Disc and Actuant sport Zacks Rank #1 (Strong Buy), Graco carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

In the last 60 days, earnings estimates for each of these stocks improved for the current year. Also, average positive earnings surprise for last four quarters has been 250.43% for Twin Disc and 12.81% for Graco while Actuant recorded positive surprise of 8.33% in the last quarter.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: SWK , ATU , GGG , TWIN

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