Stanley Black & Decker overcame a weak demand environment to post higher revenue and net income on Thursday, but the stock is down because the tool maker simply reiterated its forecast. It’s a fate shared by peers in the home improvement industry and many other companies this earnings season. We have strengthened our position on the withdrawal. Revenue fell 2% year-over-year between January and March to $3.87 billion, beating the $3.82 billion expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share came in at 56 cents, beating the estimate of 54 cents, according to LSEG data. Stanley Black & Decker Why We Own It: Stanley Black & Decker is in the final stages of a multi-year restructuring plan. The company has launched a series of initiatives designed to generate cost savings, optimize inventory, streamline and simplify the organization and transform its supply chain. Although the repair and remodeling demand environment is weak due to higher interest rates, management’s cost-cutting plan will create a stronger business for the next cycle. While we wait for the recovery to occur, we receive a large dividend. Competitors: Bosch, Techtronic Industries and Illinois Tool Works Most Recent Purchase: May 2, 2024 Initiation: June 14, 2023 Bottom Line Stanley Black & Decker delivered another strong quarter of execution on issues within management’s control. The company is implementing its plan to optimize costly inventory, reduce complexities and improve its supply chain to achieve $2 billion in annual savings by the end of 2025. Progress is evident in the results, with adjusted gross margins continuing to improve. The only problem is that the overall demand environment remains weak overall, preventing management from raising the midpoint of its outlook. Given the stock’s lackluster performance year-to-date, we would have thought that investor expectations had fallen enough to be satisfied with beating and supporting forecasts. However, there is always someone whose expectations are too high. This sends the stock down more than 7%. Stanley Black & Decker’s professional customers remain resilient, but demand from DIY customers has not returned to growth. This should be widely understood, and we expect to hear similar talk when Home Depot and Lowe’s report results later this month. We likely won’t see a significant rebound in DIY activity until mortgage rates fall and reinvigorate the existing home sales market. We focus on existing home sales because the first thing people typically do after purchasing an older home is spend money on repair and remodeling projects. This dynamic makes Stanley Black & Decker one of the most interest rate sensitive stocks we have in our portfolio. We don’t want to have too much in this “higher for longer” environment, but at least with Stanley Black & Decker our patience is rewarded with a high dividend yield of around 3.80%. The thesis may take longer to play out, but management’s moves to cut costs in a sluggish environment will make its earnings power more impressive once the cycle turns. We are lowering our price target from $110 to $105 as rate cut expectations continue to be pushed back, extending the DIY market’s recovery timeline. But we reiterate our 1 rating and bought this pullback earlier on Thursday. Quarterly Commentary Stanley Black & Decker’s largest segment by far – known as Tools & Outdoor – generated sales of $3.29 billion in the quarter, surpassing the expected $3.27 billion by analysts, according to FactSet. However, operating profit of $279 million slightly missed analysts’ projections of $286 million, according to FactSet. Volume growth of 1% in DeWalt power tools, the company’s flagship product, could not overcome a muted consumer and a soft DIY environment, which put pressure on hand tool sales. Outdoor organic revenue increased 2% during the quarter, primarily driven by demand for outdoor portable wireless power equipment. Prices have remained stable, which we think is positive because it shows that the company is not reducing prices to stimulate demand. Once you give up on a price in this industry, it’s very difficult to get it back. Sales in Stanley Black & Decker’s smaller industrial segment, largely comprised of fasteners for end markets such as automotive and aerospace, totaled $585 million in the period, missing the $596 million estimate. dollars, according to FactSet. The segment’s quarterly operating profit of $71 million beat estimates by $63 million, according to FactSet. Organic sales fell 4%, partially offset by a 1% price increase across the segment. Within the segment, its so-called Engineered Fastening business saw its organic revenues grow by 5% thanks to an increase of 30% in aerospace and 4% in automotive. As a reminder, Stanley finalized the sale of its Infrastructure business on April 1 for $760 million in cash. The net proceeds from the sale were used to reduce short-term debt in the second quarter. The company’s adjusted gross margin of 29.0% was a strong performance, improving 590 basis points from last year and beating expectations of 28.7%. This result keeps the company on track to meet its full-year target of around 30%. The gross margin improvement was driven by lower clearance costs, benefits from supply chain transformation and reduced shipping costs. Free cash flow was negative, which is typical of the seasonality of the first quarter. However, the result was a little better than expected due to stock control. The company’s capital deployment priorities this year are to invest in organic growth, fund the dividend and strengthen the balance sheet. Stanley Black & Decker has paid a dividend for 147 consecutive years, with increases in each of the last 56 years. Guidance Management made no real changes to its forecast for 2024. It still expects the company’s total organic sales to remain relatively unchanged, more or less in the low single digits. At a sector level, organic sales in the Tools & Outdoor sector are expected to be relatively stable at the midpoint, while those in the Industrial sector are expected to be relatively stable to slightly positive. Margins in the Outdoor Tools & Activities sector are expected to improve year-over-year, while those in the Industrial sector are expected to remain stable. Management continues to expect adjusted EPS to be between $3.50 and $4.50. Given the selloff in stocks, Wall Street had to look for a signal that earnings were trending toward the upper end of the range, based on the consensus forecast of $4.14. That was way too optimistic. This modeling came well before the market erased its expectations of multiple interest rate cuts this year. Although Stanley’s wide profit range leaves us ambiguous for the rest of the year, CFO Patrick Hallinan said he believes the midpoint of the range can be reached through cost control. At the same time, management reiterated its adjusted free cash flow of $600 million and $800 million for the full year. Additionally, the company expects gross margins to increase sequentially in both halves of 2024 and total 30% for the full year. Gross margins are expected to be in the 30s by year-end, setting up 2025 for another year of strong year-over-year profit growth, even if the demand environment remains tepid. The company’s long-term adjusted gross margin target of 35% is supported by the $2 billion in annual savings it expects by the end of next year. “We remain confident that our transformation can support the sustainable cost structure and efficiencies needed to return our adjusted gross margin to 35% or higher while enabling targeted growth investments,” Hallinan said. (Jim Cramer’s Charitable Trust is long SWK. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. 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Stanley Black & Decker electric drills are displayed for sale at a Home Depot store in Colma, California.
David Paul Morris | Bloomberg | Getty Images
Stanley Black & Decker overcame a weak demand environment to deliver higher revenue and net income on Thursday, but the stock is down because the tool maker simply reiterated its forecast. It’s a fate shared by peers in the home improvement industry and many other companies this earnings season. We have strengthened our position on the withdrawal.
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