Stanley Black & Decker Still Not Getting Much Benefit Of The Doubt

Between worries about retail demand, construction spending, auto build rates, and input costs (including tariffs), Stanley Black & Decker (SWK) still hasn’t been getting all that much love. This is part and parcel of the challenges of “buying the dip” as I outlined in my prior piece, though Stanley has only modestly underperformed industrials in general over the past three months (though Snap-on (SNA) has been much stronger), the year-to-date performance is still pretty weak and there are valid reasons to worry that management’s guidance for the second half is too aggressive.

I do see some near-term risks, but I think the valuation is pretty interesting. I do believe the Craftsman acquisition creates some interesting opportunities, and I likewise think Stanley has the option to deploy capital into potentially value-enhancing transactions within fastening. Against that “interesting” valuation, though, is the reality that this company’s track record with respect to ROIC and margin improvement are not great and there are execution risks to consider.

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Stanley Black & Decker Still Not Getting Much Benefit Of The Doubt

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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Seeking Alpha: Can Stanley Black & Decker Shake Off This Sluggishness?

Given that Stanley Black & Decker (NYSE: SWK) isn't quite as exposed to a U.S. housing recovery as commonly believed, it isn't the uncertain pace there that is keeping growth down. Rather, Stanley Black & Decker is seeing broad-based sluggishness across almost all of its businesses. While further diversification into industrial fasteners makes some long-term sense and the stock's valuation is not demanding, investors will have to have some patience to see this one work out.

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Can Stanley Black & Decker Shake Off This Sluggishness?

Investopedia: Stanley Black & Decker May Be Surprisingly Cheap

Every once in a while it's a good idea for investors to broaden their horizons and re-examine some ideas of the past. While I have been spending a fair bit of time on industrial supply companies and overseas toolmakers like Atlas Copco and Techtronic, it may be the case that there's an interesting stock here in the States. More to the point, Stanley Black & Decker (NYSE:SWK) has some challenges and real risks, but looks surprisingly cheap after its latest earnings report.

The Consummate Noisy Quarter 

Unfortunately, assessing Stanley's quarter takes a fair bit of work for all of the moving parts. The company reported revenue growth of almost 16%, with 6% organic growth from a 5% volume increase and a 1% price increase. This was a pretty solid result. Breaking it down, the Construction/DIY business saw 4% reported growth (or 8% organic growth after excluding Pfister), Industrial was up more than 11% (7% organic), while Security was up almost 47% as reported, but flat on an organic basis.

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