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We recently upgraded our recommendation on industrial tool maker, Stanley Black & Decker Inc. (SWK - Analyst Report) to Neutral. The stock was previously rated Underperform by us.

Why Upgrade to Neutral?

Stanley Black & Decker is a major player in the machine tools and accessories industry, currently having a $13.1 billion market capitalization. We believe future growth prospects of industrial tool makers are very bright as demand for tools is expected to surge as the global economy revives slowly. Emerging markets are likely to be a favourite destination for these companies.

Talking about Stanley Black & Decker alone, we see the company’s strategic initiatives position it well for growth. Acquisitions carried out in the past have proved to be very advantageous for the company. Mention may be made of Black & Decker and Niscayah, both acquired in 2011 and Infastech, Hong Kong based leading manufacturer and supplier of specialty engineered fastening technologies, purchased in February 2013.

Besides acquisitions, divestment of non-core assets has helped the company utilize the free resources in a meaningful way. Divestment of Hardware & Home Improvement Group (HHI) in Dec 2012 fetched Stanley Black & Decker after-tax proceeds of roughly $1.3 billion, which the company intends to utilize for share buybacks, dividend payments or acquisitions.  

These positives notwithstanding, it’s the near-term concern that has restricted our recommendation change on Stanley Black & Decker to Neutral. Management’s guidance for 2013 points towards a weak security and industrial markets in the United States in 2013, offsetting slight gains expected from the housing market related recovery. It is anticipated that European markets would witness a decline in the industrial and security markets and flat construction market. Headwinds are also expected from a higher tax rate and escalating interest expense.

Others Stocks to Consider    

Other stocks to watch out for in the industry are Proto Labs, Inc. (PRLB - Snapshot Report), Kaydon Corporation and Actuant Corporation (ATU - Analyst Report), each holding a Zacks Rank #2 (Buy).

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