Earnings Analysis: Stanley Black & Decker, Inc.

Oct.21.12 | About: Stanley Black (SWK)

Stanley Black & Decker Inc. (NYSE:SWK) reported preliminary financial results for the quarter ended 2012-09-30.

Stanley Black & Decker Inc. recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Stanley Black & Decker Inc.'s analysis versus peers uses the following peer-set: Makita Corp. ADS (OTCPK:MKTAY), Snap-On Inc. (NYSE:SNA), Lincoln Electric Holdings Inc. (NASDAQ:LECO), Kennametal Inc. (NYSE:KMT), Husqvarna AB (HUSQ.B), Toro Co. (NYSE:TTC) and HIWIN Technologies Corp. (2049). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.



Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 2,786.7 2,814.2 2,652.9 2,736.1 2,636.4
Revenue Growth % (1.0) 6.1 (3.0) 3.8 0.5
Net Income 115.2 154.8 121.8 163.8 154.6
Net Income Growth % (25.6) 27.1 (25.6) 6.0 (21.6)
Net Margin % 4.1 5.5 4.6 6.0 5.9
ROE % (Annualized) 6.6 8.8 6.9 9.3 8.5
ROA % (Annualized) 2.8 3.8 3.0 4.0 3.8
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Valuation Drivers

Stanley Black & Decker Inc.'s current Price/Book of 1.7 is about median in its peer group. The market expects Stanley Black & Decker Inc. to grow faster than the median of its chosen peers (PE of 21.6 compared to peer median of 15.1) and to improve its current ROE of 7.8% which is below its peer median of 18.4%. Thus, the market seems to expect a turnaround in Stanley Black & Decker Inc.'s current performance.

The company does not seem to have a viable operating strategy as is evident from low net profit margins (currently 5.1% vs. peer median of 9.1%) and poor asset turns (currently 0.7x compared to peer median of 0.9x). We classify this operating model as problematic relative to its peers. Stanley Black & Decker Inc.'s net margin is similar to its five-year average net margin of 5.5%.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 23.4% and better than peer median earnings growth performance 248.1%. Stanley Black & Decker Inc. currently converts every 1% of change in annual revenue into 10.6% of change in annual reported earnings. We view this company as a leader among its peers.

Stanley Black & Decker Inc.'s return on assets is less than its peer median currently (3.3% vs. peer median 9.5%). It has also had less than peer median returns on assets over the past five years (4.7% vs. peer median 7.8%). This performance suggests that the company has persistent operating challenges relative to peers.

The company's gross margin of 39.9% is around peer median suggesting that Stanley Black & Decker Inc.'s operations do not benefit from any differentiating pricing advantage. In addition, Stanley Black & Decker Inc.'s pre-tax margin is less than the peer median (6.3% compared to 13.2%) suggesting relatively high operating costs.

Growth & Investment Strategy

Stanley Black & Decker Inc. has grown its revenues faster than its peers (32.8% vs. 5.7% respectively for the past three years). The market also sees relatively higher long-term growth prospects for the company, giving it a better than peer median PE ratio of 21.6. Overall, we classify the company's growth prospects as superior relative to its peers.

Stanley Black & Decker Inc.'s annualized rate of change in capital of 46.4% over the past three years is greater than the peer median of 9.4%. This relatively high investment has generated a less than peer median return on capital of 5.4% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.

Earnings Quality

Stanley Black & Decker Inc. reported relatively weak net income margins for the last twelve months (5.1% vs. peer median of 9.1%). This weak margin performance and relatively conservative accrual policy (3.7% vs. peer median of 0.1%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

Stanley Black & Decker Inc.'s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Stanley Black & Decker, Inc. provides power, hand tools and mechanical access solutions such as automatic doors, commercial and residential locking systems, electronic security and monitoring systems. It also manufactures and markets industrial tools and security solutions. The company operates through three segments: Construction & Do-It-Yourself, Security and Industrial. Stanley Black & Decker was founded by Frederick T. Stanley in 1843 and is headquartered in New Britain, CT.


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Disclosure: I 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. I have no business relationship with any company whose stock is mentioned in this article.