Stanley Black & Decker’s guidance pressures the stock. But Cramer says buy the dip
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Stanley Black & Decker reported mixed fourth-quarter results Thursday but beat expectations on the metrics that matter most to our investment thesis — evidence the toolmaker’s turnaround strategy is working to plan. Revenue for the three months ended Dec. 31 totaled $3.74 billion, below the $3.83 billion expected by analysts, according to estimates compiled by LSEG, formerly Refinitiv. Adjusted earnings per share came in at 92 cents, topping the 80-cent estimate, LSEG data showed. Bottom line The roughly 4% decline in Stanley Black & Decker is overdone, giving investors a chance to buy a stock that is poised to benefit from the Federal Reserve likely lowering interest rates later this year . “I would take action on Stanley Black & Decker,” Jim Cramer said Thursday. “We don’t have a lot of stocks that are levered to the Fed ultimately cutting. Those of you who want a play on the Fed cutting rates, this would be the No. 1.” The reason: Lower interest rates would likely spur activity in the housing sector, particularly in the existing home market, which is more likely to see repairing and remodeling from do-it-yourself consumers who have recently been buying fewer tools across the DeWalt, Craftsman, and Black & Decker brands. While the company’s business with professional tool customers has been stronger in recent quarters, including the fourth, an uptick overall consumer demand would go a long way to boosting Stanley Black & Decker’s overall financial performance. However, management said it expects weak consumer demand — including for its outdoor equipment — to continue this year — contributing to the overall softer-than-expected guidance on metrics including revenue growth and earnings per share. That outlook is what is most likely bringing the stock down Thursday. But we think management is ultimately skewing on the conservative side with its guidance assuming a continuation of the current demand picture, supporting our belief that the sellers are misguided Thursday. The other main reason is Stanley Black & Decker delivered better-than-expected performance on its turnaround and cost-saving efforts, evidenced by adjusted gross margins coming in at 29.8% in the fourth quarter alongside strong free cash flow generation. Remember: Our investment in Stanley Black & Decker is primarily a turnaround play: Management is working to repair a company that had its financials wrecked by supply chain challenges and the hangover from the Covid-era housing boom. All signs indicate that the improvement plan is progressing well. On Thursday, management said the company remains on track to realize $2 billion in cost savings by 2025 and return adjusted gross margins to back to the 35% level. Quarterly commentary Despite the light revenue figure, Stanley Black & Decker delivered on its cost and inventory initiatives — leading to beats in key areas, including adjusted gross income and margin; adjusted operating income and free cash flow. The ability to execute on these metrics is a real feather in management’s cap, particularly because the overall demand environment, which is out of its control, was soft in the quarter. The company’s adjusted gross margin performance of 29.8% stands out, handily exceeding the 28.1% expected by Wall Street and up from 27.6% in the prior quarter ended Sept. 30. It marked the fourth consecutive quarter of sequential improvement. Free cash flow performance was another bright spot, at $647 million versus expectations of $617 million, according to estimates compiled by FactSet. Inventory reductions, a key part to Stanley Black & Decker’s turnaround plan, totaled $240 million in the fourth quarter, helping drive the free cash flow beat. In general, this is an important line item for the Craftsman parent to consistently deliver on because free cash flow — defined as cash from operations minus capital expenditures — supports the company’s solid annual dividend yield, which stands at 3.6% based on Thursday’s stock price. Stanley Black & Decker’s largest segment by far, Tools & Outdoor, generated sales of $3.15 billion in the fourth quarter, short of the $3.28 expected by analysts, according to FactSet. However, operating income of $316 million topped analyst projections of $297 million. Sales in its Industrial division — largely made up of fasteners in end markets such as automotive and aerospace — totaled $582 million in the three-month period, narrowly missing the $587 estimate. Quarterly operating income in the segment matched estimates at $64 million. Guidance Stanley Black & Decker expects organic revenue in 2024 to be approximately unchanged year over year at this midpoint of its guidance. At the segment level, organic sales in Tools & Outdoor are projected to be relatively flat at the midpoint, while Industrial is expected to be relatively flat to slightly positive. The company aims to achieve the guidance at least partially through targeted market share gains, CFO Patrick Hallinan said. On the Industrial side, specifically, the recovery in the aerospace market should be supportive of its financial targets, the CFO said. Full-year adjusted earnings per share are expected to fall between $3.50 and $4.50, which is below the $4-to-$5 range we hoped to see. However, there could be a little noise surrounding the EPS guidance tied to the company’s decision to sell its attachment tools business , known as Stanley Infrastructure, to Swedish firm Epiroc AB for $760 million, with proceeds going to pay down debt. The deal, announced Dec. 15, is expected to close by the end of the first quarter. In a note to clients Thursday morning, analysts at Mizuho Securities said Stanley Black & Decker’s EPS range includes the dilution from the attachment-tools sale, “which likely wasn’t fully captured in consensus expectations.” Meanwhile, Hallinan said full-year free cash flow fall between $600 million and $800 million, which even at the high end is below analyst expectations of about $1 billion, according to FactSet. Hallinan indicated that more spending to relocate production facilities — what the company calls “footprint moves” — is one factor influencing the FCF guidance. Adjusted gross margin is expected to average roughly 30% in 2024, but should exit the year in the low-30% range, according to the finance chief. Hallinan said the pace margin expansion in the first half of the year will be relatively muted then pick up speed over the final six months as certain cost-saving initiatives are accelerated. “We have every confidence we’re going to get there,” the CFO said. The company also maintained its commitment to reaching its long-term margin target of 35%, which is higher than pre-pandemic levels. (Jim Cramer’s Charitable Trust is long SWK. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A worker assembles steel tool chests at a Stanley Black & Decker Inc. Craftsman Tools manufacturing facility in Sedalia, Missouri, U.S., on Tuesday, July 17, 2018.
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Stanley Black & Decker reported mixed fourth-quarter results Thursday but beat expectations on the metrics that matter most to our investment thesis — evidence the toolmaker’s turnaround strategy is working to plan.
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