Stanley Black & Decker: A Rare Quality Company, Still Fairly Valued
Summary
- Stanley Black & Decker has an enviable track record of growth and dividend increases that spans decades.
- The company has attractive financials and continues to grow at a decent pace.
- Shares are fairly valued, which is refreshing in this generally overvalued market.
Joe Raedle/Getty Images News
We continue our search for companies that are high quality and are at least fairly valued, which hasn't been easy given how expensive the market has become. It has been particularly difficult to find reasonably valued companies in the US market, which seems particularly overvalued. That is why we were surprised to find a quality company that we consider fairly valued and is US-based. The company is Stanley Black & Decker (NYSE:SWK). It might not be the sexiest or most interesting of businesses, but it does have good financials and an excellent track record.
In fact, Stanley Black & Decker has an enviable track record of growth and dividend increases that spans decades. The company has paid dividends consecutively for 145 years, and has increased it for the past 54 years. Not only that, but shares have also significantly increased giving shareholders excellent total returns. The share price for the past few decades can be seen in the graph below, and as can be seen, returns have been positive for most time periods.
It might not be as sexy as EV stocks, but the products the company makes are needed and there is a steady demand for them. The company has some iconic brands such as DeWalt, Black & Decker, Craftsman, etc. It is in fact the world's largest tool business.
Source: Stanley Black & Decker Investor Relations
The tools business accounts for the majority of revenue, with the Industrial and Security segments contributing about 15% each. Organic growth is very significant with the company expecting 16-17% organic growth for 2021.
Source: Stanley Black & Decker Investor Relations
Financials
Revenue has been steadily increasing, with an acceleration in the last decade. It currently stands at ~$17 billion. The big jump in 2010 is due to the merger with Stanley Works on March 12, 2010.
The quality of the company is reflected in its high return on equity (ROE) and return on invested capital (ROIC). These are financial metrics of a well-run operation, which also has competitive advantages. Both these metrics are somewhat cyclical, with recent performance being close to the top of the range.
Stanley Black & Decker also operates with attractive margins, gross margins are currently ~35%, and operating margins are close to 15%. This shows again that the business is above average and has a competitive moat.
The balance sheet is quite solid, the company has about $4 billion in debt, and a debt to EBITDA ratio of only ~1.5x. This gives the company ample room to complete bolt-on acquisitions or grow the business. We like when companies have financial flexibility to be able to take advantage of business opportunities should they present themselves, such as a potential acquisition or business expansion into a new market.
The company pays a decent dividend which currently yields ~1.65%, this is a bit lower than average, since it has tended to trade at an average yield of ~2% in the past few years. Still, the dividend is pretty safe given the fact that it is well covered by earnings.
Valuation
Shares are trading at a price/sales ratio of ~1.7x, which is somewhat above its 10-year median. There was a considerable dip at the start of the Covid pandemic, but shares have recovered since.
The EV/EBITDA is near the bottom of its range at ~12x, which we consider a cheap multiple for such a high-quality business. Other than during the Covid crash in 2020, shares have tended to trade at a higher multiple, even going as high as 20x.
Similarly, both the trailing twelve months and the forward price/earnings ratio are both at a reasonable ~16x multiple. This is cheaper than the stock market average, and Stanley Black & Decker is an above-average company.
Earnings are expected to increase in the next few years, and based on estimates for fiscal year 2024, shares are trading at ~13x estimated earnings of ~$14 per share.
Source: Seeking Alpha
Conclusion
Stanley Black & Decker might not be the sexiest of businesses, but it displays attractive financials and has been growing at a steady pace. Shares pay an attractive dividend, and are not overvalued, which is refreshing in this overall expensive market. We believe that shares are priced to deliver returns for the next few years in the high-single-digit to low-double-digit returns.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.
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