Stanley Black & Decker (SWK) shares have recovered from recent lows to a level that is not as attractive for new investors. The stock is economically sensitive, with a majority of its products being tied to the housing market. During the December 2018 selloff, investors could have purchased shares below historical averages and with a higher-than-average yield. This opportunity will once again arise for the patient investor the next time the market worries about a potential recession. The company is a respectable dividend aristocrat with a long history of increased capital returns to shareholders. As the company continues to acquire smaller competitors and established business lines in the industrial space, its revenue stream should continue to accelerate higher. Investors looking for an industrial space play for their portfolio should take a further look at Stanley Black & Decker when the time is right.Performance
Stanley Black & Decker continues to perform well; in the most recent quarter, the company beat on both the top and bottom lines.
Source: Seeking Alpha
The company had strong organic growth for the quarter of 4% led by the tools and industrial segments. Full-year revenue rose over 8%, helped by acquisitions. Gross margins were pressured and declined 120 basis points versus the prior year. The company has branding power, which along with it comes pricing power. So going forward it should be able to maintain operating margins as it did for this quarter. Management revised guidance downward and now expects 2019 GAAP earnings per share of $6.50-$6.60 compared to $7.50-$7.70 and adjusted earnings per share of $8.35 - $8.45 From $8.50 - $8.70. This is not that strong of growth going forward for the year. The company reported earnings of $8.15 for 2018. This means the company only expects low about 5% earnings growth compared to the prior year. Nothing exciting, but growth nonetheless. As the company finishes 2019, it will focus on its newly acquired products and bringing expanded distribution opportunities to the brands.
Source: Earnings Presentation
The company saw growth in almost every segment, minus the Security division.
Source: Earnings Presentation
I believe the company should continue to focus on being a toolmaker and steer away from the Security division it spent much time building. While this is a nice recurring revenue stream offering, it doesn't seem to fit in the portfolio much. This division is also not highly profitable. I think selling or a spinoff of the business could unlock some additional value for shareholders. It could also enable the company to continue to acquire companies that fit in its portfolio of brands.
The company has a safe balance sheet, which should please investors with any economically sensitive entity.
Stanley Black & Decker currently has $313.7 million in cash on hand, with a long-term debt of $3.908 billion and short-term borrowings of $1.45 billion. Almost all of the debt is due at fixed rates.
Despite the debt being higher than the year prior, the company should be able to cover the future obligations considering its strong cash flow conversion. The company had $769 million in FCF in fiscal 2018 and expects strong cash flow conversion again in 2019.
As the company has made very valuable and large acquisitions recently, it should continue to generate larger streams of cash. Just in the past two years, the company has acquired Newell Brands' (NWL) tool business, consisting of the Irwin, Lenox, and Hilmor brands, all well-known and respected, for close to $2 billion. It also had the chance to acquire Craftsman Tools from the now-bankrupt Sears Holdings. This was an acquisition valued at $916 million based on future payments. Then, more recently, the company has acquired IES attachments for $690 million and Nelson Fastener Systems for $430 million. These are, of course, the larger acquisitions, as the company has made smaller purchases and minority stake investments. While this is certainly a rapid pace at which to acquire, the opportunity seldom arises to add great names to a powerful portfolio, and management did not want to miss the opportunity. I believe the company is on a track to become a sort of Illinois Tool Works (ITW), a larger conglomerate of many individual operating entities.
The company is quick to note its long history of dividend payments and shareholder returns.
Source: Stanley Black & Decker Investor Relations
The company has increased its dividend for more than 50 years and should continue to do so. This should give investors confidence that with a long-term horizon, a growing stream of income should come from their investment.Valuation
Next, we take a look to see if SWK is worth adding at today's levels.
We look at the 5-year average trading valuations for shares of Stanley Black & Decker and see that it looks quite pricey at this time. This is fine if the company is expecting above-average growth, but since it is not, this means shares are too expensive. It also is trading at a higher-than-average P/S, P/E, P/B, P/CF, PEG ratio, and forward P/E. On almost every metric, it is trading at more expensive levels versus its historical 5-year averages. This tells us shares are probably due for a pullback as earnings are not expected to be significantly higher for any reason.
Next, we take a look at the historical yield to see if it offers investors a chance to acquire shares with an attractive dividend relative to its own history.
From a historical perspective, the yield is not above average. It has traded with a yield above the current 1.73% more than 90% of the time. The stock is not presenting an above-average yield until it trades above 2.5%. This means the shares would need to trade down to $110. As noted before, strong cash flow enables the company to continue to safely pay and increase the dividend. For 51 years the company has increased its dividend making it one of the few dividend kings. Investors with longer-term horizons may not care about the lower yield, however, as the dividend growth can be compounded for a higher yield on cost in the future.
Risks, of course, abound to Stanley Black & Decker, such as closure of retail stores and bankruptcies. While most retailers are doing fine in the home improvement sector, the recent bankruptcy of Sears could impact results as they carry Craftsman Tools. The upcoming quarterly report may review the potential negative impact of this. Lastly, the company could make additional acquisitions leading to an over-levered balance sheet, but I believe based on the history of the company, it will be prudent in managing this.Conclusion
While Stanley Black & Decker continues to become more than its namesake, it continues to add value and cash streams it once didn't have. Offering more than power tools should help it further in the next economic slowdown as it is now less reliant upon the housing category. Nonetheless, the company is still cyclical and relies upon strong industrial trends. A positive note is the security solutions division, which provides more than $2 billion in sales and is of recurring nature. In good times and particularly bad, security is necessary to prevent theft. Monitoring and servicing generates a recurring stream of cash flow the company can count on. As management continues to build its portfolio of brands and solutions, the company further becomes insulated from the pricing pressures of cheaper brands. As it has shown, it is resilient to many of the inflationary pricing pressures other companies are experiencing. Investors looking for a household name operating in the industrial segment with a strong history of growing dividends might look to add Stanley Black & Decker at the right price. While timing a purchase may be hard, slowly acquiring shares would be wise as an aristocrat on sale is a rare occurrence. I believe the opportunity will arise the next time the market sells off.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.