Stanley Black & Decker Appears Fixing To Go Higher

 | Jan 31, 2017 | 11:00 AM EST
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swk

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nwl

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shld

In the latest one-year period, shares of Stanley Black & Decker (SWK) are up 35% and are 9% higher just this year. Are the shares of Stanley Black & Decker fixing to go higher?

Last Thursday, Stanley Black & Decker reported fourth-quarter and full-year 2016 results. Full- year revenue totaled $11.4 billion, up 2%. The company's 4% organic growth rate was partially offset by a 2% currency headwind. Fully diluted GAAP earnings were $6.51 per share, up 10%. The company generated $1.14 billion of free cash flow. Operating margin increased 20 basis points to 14.4%.

Last Oct. 12 the company announced the planned acquisition of Newell Brands' (NWL) tool business for $1.95 billion. (Newell Brands is part of Jim Cramer's Action Alerts PLUS charitable trust.) The deal, which includes the Irwin, Lenox and Hilmor brands, is expected to add about $0.25 per share to earnings in the first year after closing.

To help fund the deal, Stanley announced on Dec. 21 it had agreed to sell for $725 million the majority of its Mechanical Security business to dormakaba of Switzerland. The deal includes the brands BEST Access, phi Precision and GMT, which produce commercial door locks and door hardware and in the last 12 months had revenue of about $270 million.

Then, on Jan. 5, Stanley Black & Decker announced it would acquire the Craftsman brand of tools from Sears Holdings (SHLD) . The deal consists of a $525 million cash payment at closing, another $250 million at the end of year three and royalty payments to Sears Holdings of 2.5% to 3.5% on new Craftsman sales through year 15. The transaction is expected to be accretive to earnings by $0.10 to $0.15 per share in the first year. Management anticipates the Craftsman deal to close later this year.

The Craftsman line generates about $1.9 billion at retail, with 65% of sales through Sears stores. About 35% of sales are tools and 40% are lawn-and-garden equipment, while the remaining 25% are storage and other items, such garage door openers.

The flurry of deals should boost Stanley's organic revenue growth to 4% this year, offset somewhat by currency fluctuations. Management guided full-year 2017 earnings per share to a range of $6.85 to $7.05 versus the $6.98 consensus. At the midpoint, earnings would be up about 7% year over year.

Using the consensus estimate, I think SWK could trade as high as $145 per share, or about 20x to 21x 2017 earnings. Assuming the housing market stays strong, the demand for tools should continue in the mid to low single digits. North America makes up 65% of Stanley's tool revenue, so it's important for the U.S. economy to stay on track. Stanley has a strong record of returning cash to shareholders, so I would expect continuing shareholder buybacks to help move things along.

I think Stanley is fixing to go higher this year.

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