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Stanley Black (SWK) Q3 Earnings Top on Higher Sales, View Up

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Industrial tool maker Stanley Black & Decker Inc. (SWK - Free Report) kept its earnings streak alive in third-quarter 2017, pulling off a positive earnings surprise of 4.3%. Results were primarily driven by organic sales growth, benefits from acquired assets and improved margins.

Earnings, excluding acquisition related charges and others, came in at $1.95 per share, surpassing the Zacks Consensus Estimate of $1.87. It also exceeded the year-ago quarter tally of $1.68 by 16.1%.

Organic and Acquisition Gains Drive Revenues

The quarter’s net sales were $3,298.6 million, increasing 14.5% from the year-ago tally. The performance was driven by 7% volume gains, 1% positive currency impact and 9% gain from acquired assets, partially offset by 3% adverse impact from divested assets.

Also, the top line exceeded the Zacks Consensus Estimate of $3.16 billion by 4.3%.

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

Tools & Storage’s revenues totaled $2,318.2 million, representing 70.3% of net revenues in the quarter. On a year-over-year basis, the segment’s revenues grew 22.2% on the back of 9% gain from volume growth, 13% from acquired assets and 1% from currency movements. These positives were partially offset by 1% negative impact from divestitures.

Industrial generated revenues of $503.6 million, accounting for roughly 15.3% of net revenues in the quarter. Sales grew 8.9% year over year primarily driven 8% and 1% benefit from volume growth and favorable currency movements, respectively.

Revenues from Security, roughly 14.5% of net revenues, decreased 8.8% year over year to $476.8 million. Favorable currency impact of 2% and acquisition gain of 3% were more than offset by 14% negative impact of divestitures.

Margin Profile Improves

In the quarter, Stanley Black & Decker’s cost of sales increased 13.8% year over year, accounting for 61.8% of quarter’s net sales versus 62.4% in the year-ago quarter. Gross margin grew 60 basis points (bps) to 38.2% as benefits from volume growth and improved productivity offset the negative impact of commodity inflation.

Selling, general and administrative expenses increased 17.1% year over year while as a percentage of revenues, it grew 50 bps to 22.9%.

Balance Sheet & Cash Flow

Exiting the third quarter, Stanley Black & Decker had cash and cash equivalents of $483.3 million, down from $539.5 million in the previous quarter. Long-term debt (net of current portions) was roughly flat at $3,818 million.

In the quarter, the company generated net cash of $356.9 million from its operating activities, increasing 44.7% year over year. Capital spending totaled $91 million versus $78.1 million in the year-ago quarter. Free cash flow improved to $265.9 million compared with $168.6 million in the year-ago quarter.

During the quarter, the company paid cash dividends of approximately $94.7 million and repurchased shares worth $0.6 million.

Outlook

For 2017, Stanley Black & Decker increased its earnings forecast to $7.33-$7.43 per share from the previous projection of $7.18-$7.38, primarily on the back of benefits accrued from higher organic revenue growth (of roughly 6%), operational excellence and acquired assets. The revised guidance represents year-over-year growth of 13-14%.

Free cash flow conversion is predicted to be 100%.

Stanley Black & Decker, Inc. Price and Consensus
 

Stanley Black & Decker, Inc. Price and Consensus | Stanley Black & Decker, Inc. Quote

Zacks Rank & Key Picks

With a market capitalization of $24.2 billion, Stanley Black & Decker currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the machinery industry include A.O. Smith Corporation (AOS - Free Report) , Kennametal Inc. (KMT - Free Report) and Lincoln Electric Holdings, Inc. (LECO - Free Report) . All these stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

A.O. Smith’s earnings are predicted to grow 14.2% and 12.4% year over year in 2017 and 2018, respectively. Also, the company pulled off an average positive earnings surprise of 3.25% over the last four quarters.

Kennametal’s earnings for fiscal 2017 are predicted to grow 44.8% year over year while the same for fiscal 2018 are likely to rise 20.8%. Also, the company delivered an average positive earnings surprise of 4.02% over the last four quarters.
 
Lincoln Electric Holdings reported an average positive earnings surprise of 5.45% over the last four quarters. Earnings for 2017 are predicted to grow 14.1% year over year and 11% for 2018.

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