Two important questions to ask before you buy Stanley Black & Decker, Inc. (NYSE:SWK) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, SWK is currently valued at US$17b. I will take you through SWK’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
What is free cash flow?
Free cash flow (FCF) is the amount of cash Stanley Black & Decker has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
There are two methods I will use to evaluate the quality of Stanley Black & Decker’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Stanley Black & Decker’s yield of 2.67% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Stanley Black & Decker but are not being adequately rewarded for doing so.
Is Stanley Black & Decker’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at SWK’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 26%, ramping up from its current levels of US$1.5b to US$1.9b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SWK’s operating cash flow growth is expected to decline from a rate of 15% in the upcoming year, to 1.2% by the end of the third year. But the overall future outlook seems buoyant if SWK can maintain its levels of capital expenditure as well.
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I recommend you continue to research Stanley Black & Decker to get a more holistic view of the company by looking at:
- Valuation: What is SWK worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SWK is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Stanley Black & Decker’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.