Down 32% in the last year, Stanley Black & Decker Inc. (SWK, Financial) should leave a lot of investors scratching their heads. The company has a strong brand and solid economic moat, albeit in the less sticky consumer goods market.
Reintroducing Stanley Black & Decker
Stanley Black & Decker is a leading global manufacturer of tools, hardware and security solutions with a history dating back to the 1840s. The present incarnation was formed in 2010 through the merger of Stanley Works and Black & Decker Corp. Together, Stanley Black & Decker operates in three primary business segments.
The Tools and Storage segment includes a wide range of products such as power tools, hand tools, accessories and storage solutions under various well-known brands like Stanley, Black+Decker, Dewalt and Craftsman. These products cater to both professional and consumer markets, including the construction, woodworking and automotive repair industries.
The Industrial segment focuses on providing engineered fastening solutions and infrastructure products for various industries, including automotive, aerospace, electronics and construction. Some of the brands in this segment include Stanley Engineered Fastening, POP and Nelson.
The Security segment offers electronic security solutions, mechanical security products and automatic doors for commercial, institutional and residential applications. Brands in this segment include Stanley Security, BEST and Sargent & Greenleaf.
Strong brands, good financials
As previously noted, Stanley Black & Decker owns and operates many well-known brands across multiple categories.
Black & Decker was founded in 1910 and offers a wide range of power tools, hand tools and home improvement products. Dewalt is the leading brand in its portfolio of power tools, specializing in cordless drills, impact drivers and other power tools with about 15% of market share. Craftsman specializes in power and hand tools as well, plus outdoor equipment, and dates its history back to 1927. Tthe 176-year-old Stanley brand also offers hand tools and storage solutions, mainly for professionals. Collectively, these brands dominate the space with more than 30% share. Across all of its products, the company produced more $16.9 billion in sales and more than $1 billion in net income last year. This is up from $10.9 billion in sales and $490 million in profit during 2013.
That said, there is room for improvement. On a per-employee basis, the company looks more like a service firm rather than a manufacturer of brand name products. The company produces $312,000 in sales and just $19,600 in net profit per hire. With around 54,000 employees, the cost of revenue per employee is pretty high at $231,273. Despite that, Stanley Black & Decker has been able to more than double its net income and book nearly $6 billion in retained earnings since 2013, albeit at zero gain in market value. The stock trades at basically the same value as it did in 2013, down 63% from its May 2021 highs.
In fact, the company reported its first quarterly loss in years at the end of 2022. That report was actually slightly better than expectations, which is why the stock price seems to have stabilized, up slightly year to date.
Transformation in progress
Stanley Black & Decker is not sitting idle. In the third quarter of last year, the company began to cut costs by streamlining and reducing inventory. The ultimate goal is to promote long-term growth, further enhance profitability and generate healthy cash flow. By the end of the year, Stanley Black & Decker had achieved $135 million in savings thanks to a further reduction in workforce and lower indirect spending, with global cost reduction program reaching $200 million in total savings.
Fast forward, and the company is on track to save north of $1 billion by the end of this year and around $2 billion by 2025. This is why paying a high multiple today is likely worth it. So while the outlook for 2023 remains uncertain, as the company navigates a extremely challenging retail environment, long term it should get back to the financial consistency it has been known for. This is why paying a high multiple today is likely worth it long term.
Mr. Market is trading the stock at a discount
On May 11, 2021, the stock price was $217. Today, it is trading below $90, putting its market capitalization around $14 billion. Will its recent efforts translate back into a $35 billion market cap? Only time will tell, but from a brand standpoint alone, the company has enough runway to make it work.
One thing is for sure, there are few businesses with the level of staying power and financial consistency as Stanley Black & Decker. The company has provided investors with both 54 straight years of dividends and 54 straight years of dividend growth. This year it is looking to pay out $3.20, a 3.7% yield. Historically, this yield has been closer to 2.25%.
More importantly, the company is almost assuredly returning to higher profitability. One disappointing year financially may kill smaller, less-known brands, but all this has done was make Stanley Black & Decker more valuable long term for today's shareholders. It is trading at 0.75 times sales, where historically that has been nearly double at around 1.47.
On these accounts, the stock looks like a bargain.
