Why Stanley Black & Decker is an excellent value for patient investors (NYSE:SWK)

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joe raedle

Some would say that the 2000 to 2010 time frame was a lost decade for stocks. However, I would say that the time period from 2010 to 2019 was a lost decade for value investors, with many cyclical stocks masquerading as growth. at any price during this time period.

This brings me to Stanley Black & Decker (New York Stock Exchange:SWK), which is one of those stocks that has slumped this year. In this article, I highlight why now may be a great time for the value investor to pick up this hard-hit dividend gem.

Why SWK?

Stanley Black & Decker is a diversified industrial company with businesses in tools and storage, commercial electronic security, and engineering fastening. It has been in business for over 170 years and is a well recognized brand with a loyal following. The company has a diversified product line and operates in more than 60 countries.

SWK stock has seen a lot of negativity over the year, with the price down 60% since the start of the year. As shown below, SWK is now trading at levels not seen since 2012, resulting in a “lost decade” for the stock, with a disappointing 8.6% rise in share price over the past 10 years.

swk action

SWK Shares (Looking for Alpha)

Of course, no stock gets that cheap without its share of headwinds. While SWK’s total revenue rose 9% year-on-year to $4.1 billion in the third quarter, this was largely due to recent acquisitions of outdoor electrical equipment, strong industrial growth and higher prices.

However, the DIY market remains weak, driven by lower year-over-year consumer demand for home projects (compared to strong sales during the pandemic) and lower housing demand due to lower interest rates. higher. This was reflected in a 5% year-over-year drop in organic revenue from tools and exteriors.

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Additionally, SWK’s margins have been challenging with adjusted gross margin during the third quarter declining 760 basis points as higher prices were more than offset by commodity inflation, higher costs of the supply chain and the lowest volume. These factors led management to lower its adjusted EPS guidance to a range of $4.15 to $4.65 from the previous range of $5.00 to $6.00.

While SWK’s short-term is under pressure, it gives management impetus to make long-term changes to its operating model to drive efficiencies. This is reflected in the company being on track to generate cost savings of $175 million by the middle of the current year, $1 billion by the end of 2023, and grow to $2 billion by 2025. This is not insignificant for a company with a stock market. limit of only $11.0 billion. Additionally, management noted progress around investments and innovation in its strong brands during the recent conference call:

Over the next three years, we expect to redeploy $300 million to $500 million to drive innovation across our iconic brands, accelerate electrification across our outdoor and engineered bra businesses, rapidly accelerate our end-user market activation, and create the chain supply of the future.

These investments will position the company for strong, sustainable, long-term growth, profitability, consistent free cash flow generation and shareholder returns. We have a strong track record as an industry leader in groundbreaking, world-first innovations in our businesses. From FLEXVOLT to ATOMIC and XTREME to POWERSTACK, we will build on this strength to deliver an even higher quality of groundbreaking and fundamental innovations with shorter development cycles and new technologies.

Electrification is a key growth driver in our engineering and outdoor tools and accessories businesses. We plan to make incremental investments to accelerate our efforts, capitalize on equity gain opportunities, and strengthen our leadership position in the market as technology continues to change and adoption accelerates.

Meanwhile, SWK maintains a strong A-rated balance sheet and currently returns a respectable 4.3%. As shown below, this is the highest return in the last 20 years and one of the highest in the history of the stock. The payout remains comfortably covered by management’s recent earnings guidance and, in particular, SWK is a dividend king with 53 years of consecutive annual increases through a multitude of recessions.

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swk action

SWK Dividend Yield (Y charts)

Although SWK doesn’t seem to be cheap from an PE point of view (PE ahead of 17.0 based on midpoint guidance). This is mainly due to the reduction in short-term earnings. Analysts project that EPS will start to turn around next year, with EPS growing 21-42% annually over the next 2 years. Even with the current EPS depressed, SWK is still cheaper than its normal 17.8 EP over the last decade, as shown below.

swk action

SWK Rating (FAST graphics)

Investor Takeaway

While Stanley Black & Decker’s near future is fraught with challenges, the company is taking the right steps to drive growing and sustainable cost savings and investing in innovations. Analysts expect earnings to improve dramatically in the next two years. This gives value investors a great opportunity to add to this Dividend King while staying cheap with a historically high yield.

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