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Stanley Black & Decker's Prospects Solid, Risks Remain

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We have issued an updated research report on Stanley Black & Decker, Inc. (SWK - Free Report) on Sep 6, 2016. This machinery company manufactures and supplies tools and engineered security solutions.

Stanley Black & Decker, with $18.5 billion in market capitalization, has strong fundamentals, supporting growth. However exposure to near-term headwinds is restricting its growth momentum.

Below-mentioned pros and cons will justify our investment ranking on Stanley Black & Decker
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Growth Drivers  

One of the most attractive features of Stanley Black & Decker is its well-diversified product portfolio and end-market exposure. Its Security, Industrial and Tools & Storage business segments manufacture products that serve a vast clientele in various end-markets including retailers, educational, financial and healthcare institutions as well as commercial, governmental and industrial customers.

Stanley Black & Decker believes in expanding its business in domestic and international arenas through both organic and inorganic means. For 2016, the company increased its organic growth rate expectation to 4% from the earlier 3−4% range. Also, earnings are anticipated to be $6.30−$6.50 per share, up from $6.20−$6.40 projected earlier. The revised forecast is driven by improved Tools & Storage business and benefits from cost and productivity actions, partially offset by higher currency headwinds, weak industrial activities and other incremental costs.

Over the long run, Stanley Black & Decker has significant growth potential, backed by its strategy of shifting its business portfolio toward favored growth markets. For 2015−2018, the company targets to achieve approximately 10−12% revenue growth, including organic growth of 4−6%. Operating margin is expected to be roughly 16%, while earnings per share are predicted to grow in mid-teens. Also, the company wishes to follow its 50/50 capital allocation strategy of acquisitions as well as reward its shareholders. Dividend payout is predicted to be 30–35% in the long run.

Near-Term Headwinds

Stanley Black & Decker is exposed to risks arising from international expansion of businesses including adverse impacts of foreign currency translations and other geopolitical issues. For 2016, the company anticipates adverse impact of roughly $150 million from foreign currency movements. Also, the company’s segmental performances and its overall profitability are largely influenced by industrial activities and the housing markets of the U.S., as well as by economic activities of the foreign countries served.

In addition, Stanley Black & Decker is also exposed to risks arising from stiff industry rivalry from both larger and smaller companies that offer same or similar products and services, or those producing different products suitable for the same use. Also, high debt increases the company’s financial obligations and hence, might prove detrimental to its profitability.

Stanley Black & Decker currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

There are certain stocks in the machinery industry that have gained high investment value. They include DXP Enterprises, Inc. (DXPE - Free Report) , Gorman-Rupp Co. (GRC - Free Report) and Tennant Company (TNC - Free Report) , each sporting a Zacks Rank #1 (Strong Buy).

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