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Zacks Investment Research downgraded Stanley Black & Decker, Inc. (SWK - Analyst Report) to a Zacks Rank #5 (Strong Sell) on January 26.

Why the Downgrade?

Following the release of fourth quarter and year 2012 financial results on Jan 24, 2013; estimates for this industrial tool maker witnessed a sharp fall. The Zacks Consensus Estimate for 2013 went down by 2.6% to $5.58 per share while that for 2014 plummeted 0.9% to $6.64 per share.

Stanley Black & Decker reported a 12.3% year-over-year increase in its earnings, excluding one-time items in the quarter; settling at $1.37 per share. Results came to a cent above the Zacks Consensus Estimate of $1.36. In 2012, earnings came in at $4.67, up 1.3% year over year but 5.1% below the Zacks Consensus Estimate of $4.92. Revenue in the quarter improved 4.0% year over year while gross margins went up 30 basis points to 36.0%.

Leaving aside the financial results, it was the outlook for 2013 that drew a great deal of attention. For the first quarter 2013, earnings were estimated at 17.5% of full year earnings versus a historical range of 18% -19%. For 2013, earnings were guided in the range of $5.40-$5.65 per share.

Management anticipates that security and industrial markets in the United States would remain weak in 2013, offsetting slight gains expected from the housing market related recovery. Additionally, instability in the European markets, decline in industrial and security markets and flat construction market, are likely to impact the company’s business in the region.

Headwinds are also expected from a higher tax rate, with a 20-30 cent impact on earnings, and escalating interest expense, roughly a 10 cent impact. All these along with trailing four quarters average negative earnings surprise of 4.3%, leaves us with Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of -0.8% for the first quarter 2013, -0.2% for 2013 and -0.8% for 2013.

Other Stocks to Consider

Other companies to watch out for in the sector are Lindsay Corporation (LNN - Analyst Report) with a Zacks Rank #1 (Strong Buy) and MRC Global Inc. (MRC - Analyst Report) and Sandvik AB (SDVKY); both have a Zacks Rank #2 (Buy).
 

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