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Stanley Black & Decker Gains From Products Amid Cost Woes

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We have issued an updated research report on Stanley Black & Decker, Inc. (SWK - Free Report) on Oct 16.

This industrial tool maker currently has a market capitalization of approximately $19 billion.

Few growth drivers and certain headwinds, which might influence Stanley Black & Decker, have been discussed below.

Factors Favoring Stanley Black & Decker

Healthy Product Portfolio: Over time, Stanley Black & Decker has been investing to innovate and develop products. In the last three years (2015-2017), the company’s research and development expenses increased 10.3% (CAGR). Innovation will aid it in making the most of new market opportunities created by technological advancements and changing needs of customers.

DeWalt FlexVolt, a battery system, is considered one of the important breakthroughs of the company. Since its launch in June 2016, DeWalt FlexVolt gained immense popularity. The three most valuable brands of the company include BLACK+DECKER, STANLEY and DEWALT. In addition, Stanley Black & Decker opened Futures Innovation Factory and Stanley Engineered Fastening Breakthrough Innovation Center in 2017.

Moreover, the company’s another brand, CRAFTSMAN, announced that it was adopting a brand identity and launching an array of products, tools and accessories. By 2019, CRAFTSMAN plans to add in excess of 1,200 fresh items to its existing tools and products portfolio. The new offerings can be categorized under Hand Tools; Power Tools, Equipment & Accessories; Mechanic & Automotive Tools; Lawn & Garden Power Equipment; and Storage & Organization Solutions.

Value Addition Through Buyouts: Acquisitions has been instrumental in shaping Stanley Black & Decker’s growth prospects. In March 2017, brands like Lenox and Irwin were acquired as part of Newell Tools, while Craftsman branded products were also added to the company’s portfolio. Since acquired, these brands have enhanced performance of Stanley Black & Decker’s Tools & Storage segment. It’s worth mentioning here that Tools & Storage revenues increased 7.5% (CAGR) in the last three years (2015-2017). Also, the availability of Craftsman’s products in Lowe’s retail stores will create growth opportunities for the tools business.

In addition, Stanley Black & Decker acquired Nelson Fastener Systems’ industrial business in April 2018. This buyout is strengthening Stanley Black & Decker’s Engineered Fastening business. In August 2018, IES Attachments were acquired. Stanley Black & Decker’s anticipates the buyout to be modestly accretive to earnings in 2019 and add 25-30 cents per share by the third year of the completion. Moreover, in September 2018, Stanley Black & Decker’s agreed to buy 20% stake in MTD Products. This acquisition will mark Stanley Black & Decker’s entry into the global garden and lawn market.

Shareholder Return & Outlook: Stanley Black & Decker used cash amounting to $189.1 million for paying dividends and $212.7 million for repurchasing shares in the first half of 2018. The company, through the execution of a capped-call transaction in the first quarter of 2018, secured the option to purchase roughly 3.2 million shares by March 2021. Further, the quarterly dividend rate was hiked by 4.8% in July 2018.

For 2018, earnings accretion of 20 cents per share is anticipated from share buybacks. In the years ahead, the company intends to follow its 50/50 capital-allocation strategy of acquisitions and rewarding shareholders. Dividend payout is predicted to be 30-35% in the long run.

Adjusted earnings in the year are anticipated to be $8.30-$8.50 per share. Organic sales will grow roughly 7%. Acquired assets and productivity enhancement initiatives will be beneficial, while price recovery is anticipated to yield $190 million benefits versus $120 million stated in April. Cost and margin actions will yield $36 million benefits versus $10 million stated in April.

Factors Working Against Stanley Black & Decker

Rising Costs & Expenses: In the second quarter of 2018, Stanley Black & Decker recorded 14.7% growth in the cost of sales, and 6.1% in selling, general and administrative expenses. Gross margin in the quarter declined 210 basis points (bps) and operating margin fell 110 bps. We believe that unwarranted rise in costs and expenses will prove detrimental to the company’s margins, and profitability.

Stanley Black & Decker believes that inflation in commodity costs — especially for steel, base metals, batteries, resin, components, fuel and packaging — will have an adverse impact of $205 million, higher than $180 million stated in April. Also, tariffs woes related to Section 232 and Section 301 will adversely impact results by $35 million, thus, diluting earnings by 30 cents per share.

Headwinds From Currency Translation & Huge Debt Levels: Geographical diversification is reflective of a flourishing business of Stanley Black & Decker. However, this diversity has exposed it to headwinds, arising from geopolitical issues and unfavorable movements in foreign currencies. It anticipates that forex woes will have an adverse 30 cents impact on earnings in 2018.

Also, the company believes that high debt levels to address working capital requirements and higher interest rates will inflate interest expenses in 2018. However, other expenses (net) are predicted to be low.

Segmental Issues and Forex Woes: In 2018, Stanley Black & Decker predicts that commodity inflation and forex woes are likely to lead to decline in Tools & Storage segment’ margins. Security margins will fall due to initiatives to transform business structure. Also, lesser oil and gas projects, and the automotive system rollovers will adversely impact organic results of the Industrial segment. Margin will decline due to adverse impacts of commodity inflation, tariffs and Nelson Fastener buyout.

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