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Stanley Black (SWK) Beats on Q3 Earnings, Lowers '19 View

Stanley Black & Decker Inc. SWK reported better-than-expected results for the third quarter of 2019, with earnings surpassing estimates by 5.4%. Notably, in the first and second quarters, it recorded earnings beat of 29.09% and 4.31%, respectively.

Earnings, excluding acquisition-related charges and other one-time impacts, were $2.13 per share, surpassing the Zacks Consensus Estimate of $2.02. Also, earnings grew 2.4% from the year-ago quarter’s $2.08 per share, driven by robust sales and operational performances (negating the adverse impact of $90 million of external headwinds).

Tools & Storage and Industrial Segments Drive Revenues

In the quarter under review, the company’s net sales were $3,633.1 million, reflecting 4% year-over-year growth. The improvement was primarily driven by 3% rise in volume, 1% impact of positive price and 3% gain from acquired assets. These were partially offset by 2% adverse impact of unfavorable movements in foreign currencies and divestiture of 1%.

However, the top line lagged the Zacks Consensus Estimate of $3,641 million by 0.2%.

Stanley Black reports revenues under three segments. A brief discussion on the quarterly results is provided below:

Tools & Storage’s revenues totaled $2,534 million, representing 69.8% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues grew 3.5% on 4% gain from volume growth and 1% from favorable pricing, partially offset by 1% adverse impact of currency movements.

The Industrial segment generated revenues of $632.7 million, accounting for roughly 17.4% of net revenues in the reported quarter. Sales grew 12.6% year over year, primarily driven by 16% gain from the buyout of IES Attachments, partially offset by 1% negative impact of foreign-currency woes and 2% from volume decline.

The Security segment’s revenues, representing roughly 12.8% of net revenues, declined 3.8% year over year to $466.4 million. Gain of 2% from favorable pricing actions was more than offset by 3% adverse impact of foreign-currency woes, 1% volume decline and 2% adverse impact of the Sargent & Greenleaf divestiture.

Forex Woes & Tariffs Hurt Gross Margin

In the reported quarter, Stanley Black’s cost of sales rose 6% year over year to $2,388.3 million. It represented 65.7% of the quarter’s net sales versus 64.5% in the year-ago quarter. Gross margin slipped 120 basis points (bps) to 34.3% as impact of adverse currency and tariffs negated the positive impact of volume growth, favorable pricing and improved productivity.

Selling, general and administrative expenses declined 2.2% year over year to $718.8 million. It represented 19.8% of net sales in the reported quarter versus 21% in the year-ago quarter. Operating profits grew 3.9% year over year to $526 million while margin remained flat at 14.5%.

Adjusted tax rate in the reported quarter was 21.5% compared with the year-ago quarter figure of 19.5%.

Balance Sheet & Cash Flow

Exiting the third quarter of 2019, Stanley Black had cash and cash equivalents of $311.7 million, up 0.3% from $310.7 million recorded in the last reported quarter. Long-term debt (net of current portions) was roughly stable sequentially at $3,908.8 million.

In the third quarter, the company generated net cash of $192.7 million from operating activities, 0.6% higher than $191.5 million generated in the year-ago quarter. Capital spending totaled $96.7 million versus $109.4 million in the year-ago quarter.

During the reported quarter, the company paid out cash dividends of approximately $102.3 million while spent $2.7 million for purchasing treasury stocks.

Outlook

In the quarters ahead, Stanley Black anticipates gaining from a growing recognition of its brands — Craftsman, Lenox, Irwin and DeWalt FlexVolt. Further, business expansion in emerging markets, innovation and favorable e-commerce trends will be beneficial.

The company anticipates gaining from the new pricing and cost-reduction initiatives. Also, multi-year initiatives, aimed at margin expansion (three-year savings are predicted to be $300-$500 million), have been enhanced. Transformational activities as well as efforts to develop electronic security solutions will be beneficial for the Security segment. The company believes that the Security segment is poised for growth in organic sales and margins in the fourth quarter.

For 2019, the company lowered adjusted earnings projection to $8.35-$8.45 per share from the previously stated $8.50-$8.70 mainly due to the new cost-reduction program. Annual cost savings are predicted to be $200 million from the new program, while restructuring charges (pre-tax) are likely to amount to $150 million. The company believes that most of the restructuring charges will be incurred in 2019.

Organic growth will be 3.5-4% versus 4% mentioned earlier. Global factors weakened the outlook for emerging and industrial markets, and this in turn will modestly impact organic volume.

Tariff and forex woes will likely have an incremental headwind of $55 million. Lower tax rate, cost actions and margin resiliency actions will have positive impacts. Free cash flow conversion is predicted to be roughly 85-90%.

Stanley Black & Decker, Inc. Price, Consensus and EPS Surprise

 

Stanley Black & Decker, Inc. Price, Consensus and EPS Surprise

Stanley Black & Decker, Inc. price-consensus-eps-surprise-chart | Stanley Black & Decker, Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $23 billion, Stanley Black currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Industrial Products sector are Cintas Corporation CTAS, Brady Corporation BRC and Dover Corporation DOV. All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, average earnings surprise for the last four quarters was 6.26% for Cintas, 9.68% for Brady and 6.70% for Dover.

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