Stanley Black & Decker Is Getting Interesting

May 09, 2022 5:30 AM ETStanley Black & Decker, Inc. (SWK)18 Comments13 Likes

Summary

  • Stanley Black & Decker has seen material price weakness after disappointing Wall Street in the first quarter.
  • The long-term thesis should be intact, and the company could see an uptick in demand in the second half of this year.
  • I also highlight the dividend, valuation, and other points worth considering.
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The recent market volatility has created a number of bargain opportunities across multiple sectors. Apparently, Warren Buffett also thinks so as he put $41 billion to work in equity markets during the first quarter alone.

While one may be tempted to buy the dip in once high-flying tech names, I see value in perceived "old economy" stocks that have tried and true business models that are profitable. This brings me to Stanley Black & Decker (NYSE:SWK), which is a Dividend King whose price has gotten interesting in recent weeks. I highlight what makes SWK a Buy at present, so let's get started.

Why SWK?

Stanley Black & Decker is a diversified industrial company with businesses in tools & storage, commercial electronic security, and engineered 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 lineup and operates in over 60 countries.

SWK has seen material share price weakness in recent months. At the current price of $121, SWK now trades well below its 200- and 50-day moving averages of $173 and $143, respectively. As shown below, SWK stock now carries an RSI score of 32, indicating that it's getting very close to falling into oversold territory.

swk stock

SWK Stock Technicals (StockCharts)

At the same time, the falling share price has boosted SWK's dividend yield to 2.6%, which now sits close to a 10-year high outside of the pandemic time frame. While a 2.6% yield isn't considered to be high, it is nearly twice that of the 1.4% yield provided by the S&P 500 (SPY) at present. Moreover, SWK is a Dividend King after having raised its dividend annually for 53 consecutive years. Its dividend also comes with a very safe 30% payout ratio and a 5-year dividend CAGR of 6%.

swk stock dividend

SWK Dividend (YCharts)

One of the key reasons for why SWK's has fallen recently is due to its disappointing earnings, which was impacted by supply chain constraints and inflation. In the first quarter, total revenue grew by 20% YoY, driven by acquisitions in outdoor power equipment and price realization.

Organic revenue declined by 1%, however, signaling a challenging demand environment, as +5% price growth was not enough to offset the 6% decline product volume. In addition, Gross Margin was done by 610 basis points from the prior year, as price growth was more than offset by input cost inflation and lower operating leverage across its manufacturing platform due to lower volumes.

I see reasons to be optimistic despite the less than optimal results, however, as new home construction is expected to be robust for the remainder of this year, as supported by a significant housing supply issue just as millennials increasingly reach the age at which they purchase homes.

As such, management expects repair/remodel and new home construction to grow in the mid- to high single digit rates over the next 2 years, lending support to SWK's tooling equipment. In addition, commercial construction could be another growth driver, as noted during the recent conference call:

Commercial construction is still in the early stages of a post-COVID recovery and the secular drivers for safe, healthy, professional working spaces and more efficient buildings will contribute to positive activity levels in 2022 and the coming years. And lastly, we have strong backlogs in our industrial businesses and we remain optimistic that cyclical recoveries in the auto and the aerospace sectors are beginning to emerge. This is very meaningful to both revenue growth and profitability for the segment. To size it, we think it is a $300 million to $400 million multiyear growth opportunity with accompanying margins returning to the mid- to high teens over time.

Meanwhile, SWK maintains a very strong A rated balance and plans to make the best out of the low priced shares by completing its $4 billion share repurchase by the end of 2023. I see value in the stock at the currently low price of $121 with a blended PE of just 11.7, sitting well below its normal PE of 17.8 over the past decade. Sell side analysts have a consensus Buy rating on SWK with an average price target of $161.67, implying a potential one-year 36% total return including dividends.

SWK stock valuation

SWK Valuation (FAST Graphs)

Investor Takeaway

Stanley Black & Decker is an attractive long-term investment at the current price. While the company's recent earnings have been disappointing, I see reasons to be optimistic about its future prospects, particularly in the housing and commercial construction markets. Moreover, the stock offers a historically high dividend yield of 2.6% at present, which is well above the market average. As such, SWK appears to be a solid value opportunity at the moment.

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This article was written by

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I'm a U.S. based financial writer with a BSc in Economics and an MBA in Finance. I have over 12 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers.  Contributing author for Hoya Capital Income Builder. 

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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.

Additional disclosure: I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

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