Assa Abloy: Consistent Historical Execution Versus Uncertain Non-Resi Trends

It's hard to fault Assa Abloy (OTCPK:ASAZY) (ASSA-B.ST) for consistency over the past decade. Organic growth has been steadily positive (a little above 3%), adjusted operating margins have reliably been in the 16%'s, FCF margins have hovered around 10%, and the company has continued to grow its electromechanical lock and automation businesses, while maintaining a market share above its three largest competitors combined.

The problem with that consistency, though, is that it's hard to make a case that the business is going to meaningfully inflect above-trend. I'm sure there will be "rebound growth" after what will be a horrible 2020, but the outlook for non-resi construction isn't so great now, and I'm not really sure there's a strong argument that investments in areas like mobile or touchless access will drive a major change in the business. I do believe that Assa Abloy can achieve mid-single-digit long-term revenue growth and mid-to-high single-digit FCF growth, and I think this is a good stock to own at the right price, but right now it looks like too much is being expected of this steady non-resi play.

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Assa Abloy: Consistent Historical Execution Versus Uncertain Non-Resi Trends

Seeking Alpha: Assa Abloy Has Growth Locked Up

Assa Abloy (OTCPK:ASAZY) has a lot of the traits that investors looking for high-quality companies ought to prize. The company generates good returns on capital and consistently generates good cash flow from its revenue base. It also has a market leadership position, but operates in a market that still leaves it ample room to expand and grow. While the organic growth rate has been pretty dismal over most of the past decade, the severe disruptions to the construction markets in Western Europe after the collapse of the credit bubble certainly created some headwinds.

The problem (and if there was ever going to be a Stephen Simpson Seeking Alpha drinking game, this is where you'd take a shot) is valuation. Even amidst the crapalanche that is the year-to-date global equity market, Assa Abloy isn't cheap enough for me. Assa Abloy is almost never cheap, and I won't argue that it should be; it's a well-run company with great share. What's more, North American and Western European non-residential and residential construction look like good markets to be in for 2016. Nevertheless, I just can't connect the dots and come up with a valuation that makes me a willing buyer at today's price.

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Assa Abloy Has Growth Locked Up

Seeking Alpha: Stanley Black & Decker Doesn't Inspire Yet

Arguably still best known as a power tools and hand tools company, Stanley Black & Decker (SWK) has spent considerable sums on M&A in the name of diversification. Thus far these deals haven't meaningfully helped the company's returns on capital nor its free cash flow generation, due in no small part to ongoing challenges with its Security business. Although Stanley Black & Decker doesn't look unreasonably valued relative to EBITDA and it has significant self-improvement potential, the shares already price in a lot of cash flow-based improvement.

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Stanley Black & Decker Doesn't Inspire Yet

Investopedia: Ingersoll-Rand Outperforming As Management Hits Its Marks

Credit were credit is due – Ingersoll-Rand (NYSE:IR) has been in a seemingly never-ending state of restructuring since 2008, but management seems to be hitting its marks recently. Leaner manufacturing, smarter sourcing, a refreshed product line up and solid pricing all seem to be leading to the improved results that have been expected for some time now. Although these shares still don't look particularly cheap, Ingersoll-Rand is heavily leveraged to a recovery in residential housing and commercial construction and continued outperformance on margin targets could very well push the shares higher.

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http://www.investopedia.com/stock-analysis/072213/ingersollrand-outperforming-management-hits-its-marks-ir-hon-utx-jci-swk.aspx

Investopedia: Stanley Black & Decker Offers Leverage To Construction And Internal Improvements

Investors have already started making moves on the basis of positioning themselves for the expected recovery in U.S. housing, but the leading tool company Stanley Black & Decker (NYSE:SWK) has yet to really go along for the ride. While housing-related stocks like Louisiana-Pacific (NYSE:LPX) and Mohawk (NYSE:MHK) have both nearly doubled over the past two years, Stanley Black & Decker stock is basically where it started.

Some of the lagging performance can be explained with stubbornly low margins and an increasingly debt-heavy balance sheet. At the same time, management has sold some of its housing-related assets and acquired an industrial fasteners business that offers uncertain long-term margins and cash flows at this point. All told, Stanley Black & Decker's stock is a curious proposition – while it is hard to argue that the shares are cheap on the basis of what we've seen recently, a strong recovery in the North American construction market coupled with a return to double-digit free cash flow margins would likely be powerful drivers for the stock.

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