Stanley Black & Decker, Inc. (NYSE:SWK) operates in the tools, storage, and engineered fastening solutions industry and has grown to become a leading industrial institution.
The Tools & Outdoor segment is the largest and probably the most recognized, and it specializes in products under brands like Stanley, DeWalt, Black & Decker, and Craftsman.
The firm’s global distribution network spans 60 countries but is that global reach sufficient to make the stock a buy?
What Most Investors Missed
When most investors think of Stanley Black & Decker they picture the iconic yellow and black DeWalt drills, power tools, and DIY equipment. But what’s flying under the radar is the company’s focus on its industrial and security segments, which are reshaping the company’s future.
These divisions are still in their infancy but have the potential to meaningfully support SWK’s valuation over the next decade.
Stanley Black & Decker isn’t just dabbling in security but is innovating with robotics and artificial intelligence. Through Stanley Security, management is quietly testing autonomous security robots for large industrial complexes.
These robots are aimed at surveillance applications but also can carry out thermal scans, detect structural abnormalities, and analyze real-time data to predict issues before they arise. This type of predictive maintenance and security isn’t just cutting-edge but rather it’s essential to large facilities facing labor shortages and looking to cut costs.
Stanley Security already has long-term contracts with Fortune 500 companies and large government facilities, and analysts believe it’s a significant profit center. This emerging segment may very well deliver a high-margin revenue stream that doesn’t suffer from the cyclical nature of tool sales, which is highly sensitive to housing and construction trends.
Stanley Black & Decker Revival Strategy
While the future looks rosy, the past has been somewhat murky. Stanley Black & Decker introduced a Global Cost Reduction Program with the objective of resizing the organization and decreasing inventory to ensure sustainable growth, better profitability, and enhanced cash flow.
The program outlines measures, which are aimed at lowering costs and supporting the funding base for much needed investment across key business lines.
Management expects a selling, general, and administrative planned pre-tax run-rate cost savings of $500 million and $1.5 billion pre-tax run-rate cost savings by the end of next year with targeted gross margins of over 35%.
The SG&A cost savings are expected to be derived from simplifying the corporate structure and decreasing indirect expenses. The company expects these savings to help fund $300 million to $500 million in innovation and commercial investments through 2025 to boost organic growth.
As a result, management is hoping to deliver to shareholders organic revenue growth at 2 to 3x the market rate.
The company has already generated approximately $1 billion in pre-tax run-rate savings last year, driven by reduced headcount, indirect spend reductions, and supply chain efficiencies. It has targeted to reach $2 billion in savings by the end of 2025.
Is SWK Dividend Worth It?
Stanley Black & Decker’s annual dividend is $3.28, which translates to a yield of 3.56% at the current share price. Plus, the company has a record of 54 consecutive years of dividend growth.
A point of concern is that the relatively high payout ratio of nearly 90% means most of its profit is distributed among shareholders.
Such a high payout ratio might have adverse effects on the health of the company by hindering the funds for operations, expansion, and strategic projects.
Will SWK Stock Go Up?
The consensus among analysts is that SWK stock will go up to fair value of $107.09 per share. A discounted cash flow forecast is more optimistic and pegs intrinsic value at $117 per share, suggesting as much as 27% upside opportunity.
Investors may wish to sit on the sidelines when it comes to Stanley Black & Decker shares. Although the company’s history and plans for the future present a favorable picture, it remains to be seen how effectively Stanley Black can deliver the targeted cost reductions to impact the bottom line fast enough.
The majority of the analysts covering the stock, that is, 13 out of 16, have recommended it as a ‘Hold.’ For the most part analysts see a downside risk of around 2% in the near term.
While the stock has declined more than 50% over the past three years, it has underperformed this year also to the tune of 10%. The stock is currently trading at 24.52x forward non-GAAP earnings, significantly higher than the industry peers.
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