A month has gone by since the last earnings report for Stanley Black & Decker (SWK). Shares have added about 15.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Stanley Black & Decker due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Stanley Black Q4 Earnings Meet Estimates, Down Y/Y
Stanley Black & Decker reported in-line results for the fourth quarter of 2018 and surpassed estimates for the year.
Earnings, excluding acquisition-related charges and other one-time impacts, were $2.11 per share, matching the Zacks Consensus Estimate. However, the quarterly earnings decreased 3.2% from the year-ago tally of $2.18 due to adverse impacts of higher costs of sales, interest expenses and tax expenses. Lower share count partially offset adverse impacts.
For 2018, Stanley Black & Decker's earnings were $8.15 per share, a cent above the Zacks Consensus Estimate of $8.14. Further, the bottom line increased 9.2% on a year-over-year basis.
Organic Sales and Buyouts Drive Revenues
Stanley Black & Decker's net sales were $3,634.7 million in the fourth quarter of 2018, reflecting 4.9% growth over the year-ago quarter. This improvement was primarily driven by 5% volume gain, 1% positive-price impact and 2% gain from acquired assets. These were partially offset by 3% adverse impact of unfavorable movements in foreign currencies.
The top line surpassed the Zacks Consensus Estimate of $3,602 million by 0.9%.
Stanley Black & Decker reports revenues under three market segments. A brief discussion of the quarterly results is provided below:
Tools & Storage's revenues totaled $2,582.4 million, representing 71% of net revenues in the quarter under review. On a year-over-year basis, the segment's revenues grew 4.4%, on the back of 5% gain from volume growth and 2% from favorable pricing, partially offset by 3% adverse impact of currency movements.
The Industrial segment generated revenues of $548.5 million, accounting for roughly 15.1% of net revenues in the reported quarter. Sales grew 14.2% year over year, primarily driven by 4% volume growth and 12% gain from acquired assets, partially offset by 2% negative impact of foreign currency woes.
Revenues from the Security segment, roughly 13.9% of net revenues, decreased 1.3% year over year to $503.8 million. Gain of 3% from acquisition and 1% favorable impact of pricing actions were more than offset by 3% negative impact of lower volume and 2% adverse impact of foreign currency woes.
For 2018, the company's net sales were $13,982.4 million, reflecting growth of 7.8% year over year. Further, the top line surpassed the Zacks Consensus Estimate of $13.97 billion.
High Costs Hurt Margin Profile
In the reported quarter, Stanley Black & Decker's cost of sales increased 9.4% year over year to $2,422.9 million. Cost of sales was 66.7% of the quarter's net sales versus 63.9% in the year-ago quarter. Gross margin slipped 280 basis points (bps) to 33.3% as commodity inflation, adverse currency impact and tariffs negated positive impacts of volume growth, favorable pricing and improved productivity.
Selling, general and administrative expenses decreased 7.1% year over year to $729.1 million. It represented 20.1% of net sales in the reported quarter versus 22.7% in the year-ago quarter. Operating profits grew 3.7% year over year to $482.7 million, with a year-over-year decline of 10 bps in the margin to 13.3%.
Balance Sheet & Cash Flow
Exiting the fourth quarter of 2018, Stanley Black & Decker had cash and cash equivalents of $311.4 million, down 15.5% from $368.7 million recorded in the last reported quarter. Long-term debt (net of current portions) was up 34.9% sequentially to $3,819.8 million.
In the fourth quarter, the company generated net cash of $1,220.8 million from its operating activities, roughly 70.6% higher than $715.2 million generated in the year-ago quarter. Capital spending totaled $164.7 million versus $164.5 million in the year-ago quarter. Free cash flow in the quarter was $1,056.1 million.
During 2018, Stanley Black & Decker paid cash dividends of approximately $384.9 million and repurchased shares worth $527.1 million.
In the quarters ahead, Stanley Black & Decker anticipates gaining from a growing recognition for its brands — Craftsman, Lenox, Irwin and DeWalt FlexVolt. Further, business expansion in emerging markets, innovation and favorable e-commerce trends will be beneficial.
The company anticipates adjusted earnings of $8.45-$8.65 per share for 2019, reflecting year-over-year growth of 4-6%. Organic growth will be approximately 4%, including the impact of mid-single-digit growth in Tools & Storage, low-single-digit increase in Security and relatively flat results in Industrial.
Growth in organic volume will add roughly 30-40 cents per share to earnings and benefits from cost-saving actions (net of impacts from growth investments) will boost earnings by $1.05 per share. Further, impacts of lower share count and the MTD partnership, partially offset by an increase in interest expenses, will add 10 cents.
However, these positive aspects will be offset by 15 cents per share from tax rates of 17.5%. Further, adverse impacts of tariffs, foreign currency woes and commodity inflation (partially offset by favorable pricing) will lower earnings by 90 cents to $1.00 per share.
Free cash flow conversion is predicted to be roughly 85-90%.
For the first quarter of 2019, the company predicts earnings to be roughly 13% of the yearly projection.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -26.71% due to these changes.
At this time, Stanley Black & Decker has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Stanley Black & Decker has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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