Will Santa Drop Power Tools Down the Chimney?

A flurry of retail activity occurs in the last 45 days of the year. 

Black Friday, Cyber Monday, and Christmas sales. 

As we noted in yesterday’s Spill, our Trackstar database shows search volume has picked up in some interesting retail-related categories.

Interestingly, investors are looking at Christmas gifts for dad.

While furniture and durable goods defined the last few years, financial pros are looking at stocks a little closer to home this year.

Stanley Black & Decker (SWK) is a stock many investors add to their portfolios.

Maybe because the company has increased its dividend every year for the last 54 years.

When profits are tough to come by, that’s the kind of cash flow that tickles a portfolio manager’s fancy.

In fact, recent search volume for SWK has exceeded the likes of United Airlines, Nordstrom, and the Gap.

Apparently, investors currently care more about a hammer for dad than nice clothes or a trip to Disney.

But not everything is roses for SWK.

Like many companies, it battled inflation over the last year.

Since shares’ peak in mid-2021, they’re down more than 64%.

That’s a massive drop for a steady-Eddie company.

But is Santa ready to drop some power drills down the chimney and turn things around for SWK?

Stanley Black & Decker’s Business

Stanley Black & Decker has provided tools, storage, and engineering solutions for professional, industrial, construction, and consumer use since 1843. 

DeWalt, Black & Decker, Craftsman, Cub Cadet, Hustler, and Troy-Bilt are among the company’s brands. 

The company segments its revenues into the categories Tools & Outdoor and Industrial. 

Source: Stanley Black & Decker

The majority of SWK’s revenues come from the sale of electric tools, garden tools, hand tools, and consumer mechanic tools. 

It’s been a challenging year for the firm, dealing with commodity inflation, higher supply chain costs, and inventory management. 

SWK implemented a series of initiatives to save by resizing the organization and reducing inventory. 

Right now, it’s on track to reduce costs approximately $150 to $200 million in 2022, $1 billion by the end of 2023, and $2 billion by 2025.  

It’s also worth noting that Stanley Black & Decker successfully divested its electronic security, access technologies, and oil & gas business units, reducing Q3 debt $3.3 billion. 

Financials

Source: Stock Analysis

SWK continues to focus heavily on streamlining the organization by adjusting its cost basis and inventory levels. 

Management prioritized generating cash flow through inventory reductions. They expect free cash flow to be $0.3 to $0.6 billion in Q4 2022.

Moreover, the company intends to balance share repurchase activity with its commitment to dividends, debt reduction, and strong investment-grade credit ratings. 

SWK has managed to consistently boost revenues year after year, from $11.5 billion in 2016 to $15.6 billion in 2021. Over the last 12 months, the company generated $17.2 billion in sales.

In addition, the firm pays an attractive dividend of $3.20 per share annually, a dividend yield of 3.85%.   

SWK has $408 million in cash, $8.3 billion in total debt, and a 1.1x current ratio.

That’s not a lot of cash on hand, and its interest cost it $270 million in the last year.

The real problem has been operating cash flow. SWK lost $1.739 billion in operating cash flow over the last year.

But management is keenly aware and focused on turning things around.

Valuation

Source: Seeking Alpha

Over the last five years, SWK traded at a P/E GAAP ratio of 23.3x.

Currently, it’s trading at 22.1x. That’s significantly better than its rivals. For example, Hillman Solutions Corp. (HLMN) trades at a P/E GAAP ratio of 373.7x, and The Toro Company (TTC) trades at 30.6x. Meanwhile, ToughBuilt Industries (TBLT) and Griffon Corporation (GFF) aren’t profitable.  

Additionally, SWK trades at a price-to-sales ratio of 0.73x, notably better than TTC at 2.7x and HLMN at 1x, but not as competitive as TBLT at 0.1x or GFF at 0.66x.

Profitability

Source: Seeking Alpha

SWK is accelerating its operations and supply chain transformation to improve fill rates to better match customer needs while improving gross profit margins back to historical levels of 35%.

As of now, SWK has gross profit margins of 28.3%, considerably weaker than many of its peers. For example, HLMN is at 44.5%, GFF is at 33.3%, and TTC is at 32.4%. BUt TBLT is at 23.4%. 

SWK has a relatively strong net income margin of 8.3%. It’s significantly better than HLMN at 0.27%, TBLT at -34.6%, and GFF at -6.7%. TTC barely beats SWK with a net income margin of 8.9%

One of management’s goals for SWK is to achieve free positive cash flow. As we noted earlier, it’s currently losing $1.7 billion (-$1.7 billion) in cash from operations. On the other hand, HLMN is at $58.1 million, TBLT is at -$50.7 million, GFF is at $59.2 million, and TTC is at $232.9 million. 

Growth

Source: Seeking Alpha

SWK had 103.9% quarterly earnings growth in Q3. Its revenues have grown 21.4% YoY. 

In comparison, HLMN has grown 5.08%, TBLT 56.9%, GFF 25.4%, and TTC 12%. 

SWK continues to advance innovation, electrification, and global market penetration, with a goal to achieve 2-3x growth in the market. 

Our Opinion 8/10

SWK has had many challenges this year, specifically supply chain issues, inventory management, weakness in Europe, and commodity inflation. 

But the company has worked through several challenging times in its 179 years of business. 

Management has already set forth initiatives to improve its profitability. 

We believe that long term, SWK is a buy. And with shares trading down 64% YTD, it’s time to get in. 

But keep in mind, SWK may take several years to bounce back.

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