We have issued an updated research report on Stanley Black & Decker, Inc. SWK on Apr 1.
This industrial tool maker currently carries a Zacks Rank #4 (Sell). The company’s market capitalization is approximately $20.6 billion.
Let’s delve deeper and discuss what led to the company’s poor investment appeal.
Share Price Performance & Poor Valuation: Market sentiments have been against Stanley Black & Decker for quite some time now. The company’s stock price has lost roughly 9.4% in the past year compared with the industry’s decline of 8.2%.
Also, the stock appears overvalued compared with the industry. On a P/E (TTM) basis, the company’s shares are currently trading at 16.7x compared with the industry’s 16.3x.
Earnings Estimate Revision: Stanley Black & Decker reported in-line results for the fourth quarter of 2018. Its earnings in the quarter declined 3.2% year over year due to higher costs of sales, interest expenses and tax expenses.
Earnings in 2019 will face headwinds from multiple sources (few discussed here and few in the points below). The company presumes tax rate of 17.5% to adversely impact the bottom line by 15 cents per share. The company expects earnings per share in the first quarter to be roughly 13% of 2019 guidance, with the percentage reflecting a year-over-year decline of 400 basis points (bps).
Also, earnings estimates for the company have been lowered in the past 60 days. Currently, the Zacks Consensus Estimate for earnings is pegged at $8.53 for 2019 and $9.43 for 2020, reflecting declines of 0.4% and 0.7%, respectively.
Stanley Black & Decker, Inc. Price and Consensus
Stanley Black & Decker, Inc. Price and Consensus | Stanley Black & Decker, Inc. Quote
Segmental Issues: Segmental performance of Stanley Black & Decker are highly dependent on industrial activities, housing markets and overall economic growth of the United States, and foreign nations served.
For 2019, the company expects Industrial segment’s organic sales growth to be flat year over year. This mainly reflects softness in automotive end market and a relatively flat Hydraulic Tools business. To add to the woes, Industrial segment's margin is expected to be flat, with tariffs and commodity inflation offsetting the positive aspects.
Higher Costs and Forex Woes: Stanley Black & Decker’s cost of sales increased 105% in the fourth quarter of 2018, mainly due to commodity inflation, and unfavorable impacts of foreign currency movements and tariffs. Gross and operating margins were down 280 bps and 10 bps, respectively, from the year-ago quarter. We believe higher costs, if unchecked, might be detrimental to the company’s margins and profitability.
In addition, geographical diversification has exposed the company to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the fourth quarter, forex woes adversely impacted sales by 3%.
For 2019, the company expects tariffs (including $100 million of adverse impact from Section 301), foreign currency woes and commodity inflation (likely to be partially offset by favorable pricing) to lower earnings by 90 cents to $1.00 per share.
Long-Term Debt: Stanley Black & Decker’s long-term debt balance at the end of the fourth quarter was $3,819.8 million, reflecting sequential increase of 34.9%. We believe that further issuances of debt, to fund either buyout activities or working capital needs and fulfill other purposes, will make the company more leveraged and inflate its financial obligations.
It is worth mentioning here that interest expenses in fourth-quarter 2018 increased 14.6% from the year-ago quarter. For 2019, the company predicts interest expenses to adversely impact the bottom line, while some relief is expected to come from the company’s deleveraging activities.
Stocks to Consider
Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, Sun Hydraulics Corporation SNHY and Roper Technologies, Inc. ROP. While DXP Enterprises and Sun Hydraulics currently sport a Zacks Rank #1 (Strong Buy), Roper carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for all the three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 46.55% for DXP Enterprises, 2.27% for Sun Hydraulics and 4.96% for Roper.
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