Stanley Beats on Productivity Gains and Cost Control

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Stanley Black & Decker (NYSE:SWK) has reported results for the first quarter of fiscal 2010. In the quarter, Stanley reported an EPS of 70 cents compared to 48 cents in the year-ago quarter, and above the Zacks Consensus Estimate of 59 cents. The increase in the reported EPS is attributable to the continued success of well-executed productivity projects, coupled with strict cost control.

The company completed its merger with Black & Decker Corporation. Thus, Stanley’s first quarter results includes the financials of the latter from March 13 to April 3.

Net revenues were $1.3 billion, an increase of 38% from $913 million during the first quarter of fiscal 2009, primarily due to the addition of revenues earned by Black & Decker.

The Security segment reported revenues of $414 million, representing an increase of 11% year over year, while the CDIY segment reported revenues of $561 million, up 85%. The Industrial segment reported revenues of $287 million, up 22%.

Cost of sales as a percentage of revenues increased by just 20 basis points and SG&A expense declined by 130 basis points. Thus, the operating margin expanded by 110 basis points.

Stanley reported free cash inflow of $37.2 million, up from free cash outflow of $18.1 million at the end of the first quarter of fiscal 2009.

Management believes that the merger will support the continued expansion of its global business platform. Thus, Stanley revised its 2010 outlook and expects EPS to fall within the range of $3.10 - $3.30.

Stanley has embarked on a growth strategy of aligning its business portfolio with growth markets through acquisitions and divestitures, and thereby hedging against concentration risk associated with large customers.

Stanley has been able to maintain a diversified customer base and has gradually decreased its customer concentration risk. Based on this, sales in markets outside the home center and mass merchant distribution channels have grown at a greater rate. In this regard, sales to the company’s largest customer as a percentage of total sales have decreased from 22% in 2002 to single digits. A diversified customer base is one reason for Stanley to bank on higher revenues in the long-term.

However, active competition in all of its businesses creates a difficult situation. Huge dependence on the housing industry may have an unfavorable impact on sales, earnings and cash flows in the future. Thus, we maintain our Neutral recommendation on the stock.