Stanley Works: The Misunderstood Industrial Stock Pick

Jun.11.07 | About: Stanley Black (SWK)

On June 11, The Wall Street Transcript interviewed James C. Lucas, Managing Director/Infrastructure at Janney Montgomery Scott LLC. Key excerpts, including his capital goods sector pick, follow:

TWST: The final one you mentioned was The Stanley Works (NYSE:SWK). You said it's not understood.

Mr. Lucas: The company has been around for over 150 years, and when you say Stanley, the first thing you think of are tools. Then you immediately think of Home Depot and when you think of home centers, you think of housing. Those aren't necessarily places where investors are looking, but if you look at what Stanley has been able to do over the last four or five years, there has been a pretty dramatic revamping of their portfolio. So the consumer business is now about one-third of the business. Their largest customer, Home Depot, was 25% of the company nearly five years ago and is now less than 10%. They have done a good job in terms of diversifying the end markets and lessening their concentration on the home center channel. They've also grown their industrial tools business. Industrial is a good place to be since you are not tied to consumer discretionary spending - it's dependent upon driving productivity for the customers. Stanley has also built a nearly billion-dollar security business. Security can be many things, but in this case, it's doors, locks, and commercial monitoring systems. It's a different portfolio today. Returns have improved, the cash flow has become a lot more consistent, and the company has been redeploying that cash effectively. They have paid a quarterly dividend for over 440 consecutive quarters. Strong cash flow has contributed to 39 consecutive annual increases. The result has been more consistent growth.

TWST: Is this something that can continue?

Mr. Lucas: I think so. They made a substantial acquisition at the beginning of this year in the commercial monitoring space, so the cash flow this year will be used to pay down the debt on the balance sheet. By the end of the year, they will be in a position to look at additional acquisitions going into 2008. So when you look at Stanley, the organic growth is okay. I wouldn't necessarily classify it as great, but it's okay. Margins have also been improving. You have the contribution of recent acquisitions, which are augmenting the growth. The most misunderstood part of the Stanley story is the consistent cash flow that they are able to generate.

TWST: What's it going to take for investors to give them some credit here?

Mr. Lucas: You are slowly starting to see it take place. People are starting to look at Stanley as more of an industrial company, and that's ultimately going to be what leads to the multiple expansion. Does that happen over the next two or three quarters? Probably not. Can it occur over the next two to three years? Yes, it can, and I think that ultimately will lead to multiple expansion and will continue to drive the share price higher.

SWK 1-yr chart