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Why Is Stanley Black & Decker (SWK) Down 9.2% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Stanley Black & Decker (SWK). Shares have lost about 9.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Stanley Black & Decker due for a breakout? 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 & Decker Q2 Earnings Beat on Solid Sales & Margin

Stanley Black & Decker reported better-than-expected results for the second quarter of 2019, with earnings surpassing estimates by 4.3%.

Earnings, excluding acquisition-related charges and other one-time impacts, were $2.66 per share, surpassing the Zacks Consensus Estimate of $2.55. Also, earnings grew 3.5% from the year-ago quarter's figure of $2.57 per share, driven by healthy sales performance, solid operational performance (negating the adverse impacts of $110 million of external headwinds) and 1.4% fall in shares outstanding.

Tools & Storage and Industrial Segments Drive Revenues

In the quarter under review, the company's net sales were $3,761.3 million, reflecting 3.2% year-over-year growth. This improvement was primarily driven by 1% rise in volume, 2% impact of positive price and 3% gain from acquired assets. These were partially offset by 3% adverse impact of unfavorable movements in foreign currencies.

However, the top line lagged the Zacks Consensus Estimate of $3,801 million.

Stanley Black & Decker reports revenues under three market segments. A brief discussion on the quarterly results is provided below:

Tools & Storage's revenues totaled $2,626 million, representing 69.8% of net revenues in the quarter under review. On a year-over-year basis, the segment's revenues grew 2.3% on 3% gain from volume growth and 2% from favorable pricing, partially offset by 3% adverse impact of currency movements.

The Industrial segment generated revenues of $649.9 million, accounting for roughly 17.3% of net revenues in the reported quarter. Sales grew 13.4% year over year, primarily driven by 18% gain from buyouts of IES Attachments, partially offset by 2% negative impact of foreign currency woes and 3% from volume decline.

Revenues from the Security segment, representing roughly 12.9% of net revenues, decreased 3.4% year over year to $485.4 million. Gain of 2% from acquisitions (commercial electronic security) and 1% favorable impact of pricing actions were more than offset by 3% adverse impact of foreign currency woes, 2% volume decline and 1% adverse impact of the divestiture of Sargent & Greenleaf.

Commodity Inflation, Forex Woes & Tariffs Hurt Margins

In the reported quarter, Stanley Black & Decker's cost of sales increased 4.4% year over year to $2,450.8 million. It represented 65.2% of the quarter's net sales versus 64.4% in the year-ago quarter. Gross margin slipped 80 basis points (bps) to 34.8% 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 3.2% year over year to $755.7 million. It represented 20.1% of net sales in the reported quarter versus 21.4% in the year-ago quarter. Operating profits increased 7.6% year over year to $554.8 million, with year-over-year growth of 60 bps in the margin to 14.8%.

Adjusted tax rate in the reported quarter was 11.6% compared with the year-ago quarter figure of 7%.

Balance Sheet & Cash Flow

Exiting the second quarter of 2019, Stanley Black & Decker had cash and cash equivalents of $310.7 million, up 10.3% from $281.8 million recorded in the last reported quarter. Long-term debt (net of current portions) was stable sequentially at $3,909.1 million.

In the second quarter, the company generated net cash of $501 million from operating activities, higher than $198 million generated in the year-ago quarter. Capital spending totaled $97.2 million versus $111.7 million in the year-ago quarter. Free cash flow in the quarter was $403.8 million, higher than $86.3 in the year-ago quarter.

During the reported quarter, the company paid cash dividends of approximately $97.7 million while spent $1.1 million for purchasing treasury stocks.

Outlook

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 (including Xtreme and Atomic) and favorable e-commerce trends will be beneficial.

Further, the company anticipates gaining from pricing actions and $250-million cost-reduction initiatives. Its multi-year initiatives aimed at margin expansion (three-year savings are predicted to be $300-$500 million) will be boon too. Also, transformational activities as well as efforts to develop electronic security solutions will be beneficial.

For 2019, the company maintained adjusted earnings projection of $8.50-$8.70 per share. This guidance suggests growth of 4-7% from the year-ago reported figure. Organic growth will be approximately 4%. Global factors have weakened outlook for emerging and industrial markets and this, in turn, will modestly impact organic volume.

Organic sales for Tools & Storage will grow in a mid-single digit while decline in low-single digit for Industrial and remain modestly positive for Security. It is worth mentioning here that the company earlier predicted modest decline for the Industrial segment.

External headwinds will have an adverse impact of $390 million (higher than the previously mentioned $340 million). Free cash flow conversion is predicted to be roughly 85-90%.

For the third quarter of 2019, the company predicts earnings of roughly 23% of the yearly projection.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -10.14% due to these changes.

VGM Scores

At this time, Stanley Black & Decker has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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