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We recently downgraded our recommendation on Stanley Black & Decker Inc. (SWK - Analyst Report) from Neutral to Underperform.
 
Why Underperform?

The industrial tool maker has solid long-term growth prospects and seems well prepared to benefit from the increase in industrial tools demand globally as well as from the rising exposure to emerging markets. The company is working hard to expand its organic growth and has implemented six strategic initiatives towards this end. Year-to-date, the company has provided a return of 5.9%.

A look into Stanley Black & Decker’s third quarter 2013 results clearly depicts that the company is performing well financially. Earnings per share in the quarter grew 13.9% year over year to $1.39 and surpassed the Zacks Consensus Estimate by a cent. Revenue increased 9.6% primarily on the back of volume gains and contributions from acquisitions.

However, near-term concerns forced us to downgrade our recommendation on Stanley Black & Decker.

In the third quarter 2013, growth in emerging markets as well as margin recovery in Security segment was below expectations. For the year 2013, management of Stanley Black & Decker anticipates that weakness continuing in the emerging markets will pull down growth rates in the Industrial and CDIY segments while the Security segment will suffer from declines in Europe. Further, the US government shutdown will impact the company’s organic growth.

Accounting for all these, Stanley Black & Decker lowered its earnings per share guidance from the $5.40-$5.65 to $4.90-$5.00 range. Organic revenue growth rate now stands at 3% versus 4%-5% expected earlier, and free cash flow guidance has been lowered to $800 million from $1 billion expected earlier.
 
In the last 30 days, the Zacks Consensus Estimate for Stanley Black & Decker has gone down by 9.0% to $4.99 for 2013 and declined by 13.1% to $5.50 for 2014. Also, we have an Earnings ESP of -3.7% for the fourth quarter 2013, -0.8% for 2013, and -1.3% for 2014.  

Other Stocks in the Industry

Stanley Black & Decker currently has $12.2 billion market capitalization. Other companies to watch out for in the industry are NSK Ltd. (NPSKY) with a Zacks Rank #1 (Strong Buy) while Timken Co. (TKR - Snapshot Report) and Norsk Hydro ASA (NHYDY), each carry a Zacks Rank #2 (Buy).

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