Drilling Down on Stanley Black & Decker

 | Dec 22, 2011 | 10:30 AM EST
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Every time the market brings a batch of new information to the table, it's your job as an inquisitive investor to determine whether it's in fact new. By that I mean, does that data nugget support a consensus currently held by the market, or does it shake things up to the point where it may help to shape a new consensus? It's tricky stuff, reading the underlying message of numbers released by prominent third parties!

We can all agree that the U.S. housing market has been in the tank for a while. However, that long-subscribed-to consensus on the housing market has begun to change, believe it or not. New facts, such as another gain in existing-home sales for November and a jolt in new-home sales, accompanied by incrementally more hopeful economists, are reasons to take notice. For me, this shift in consensus has inspired a search to find those names that are attached to housing but are not receiving the proper love by the market. Stanley Black & Decker (SWK) fulfills my quest.

One has to be shocked to see the multiples that the market has assigned to Stanley Black & Decker's stock. The company is the consolidation master of the tools industry, making a total of 19 purchases in the last two years alone, in areas such as security monitoring for homes and commercial buildings and mobile workstation technology for the health care industry. Of course, the company's major acquisitions have been Black & Decker and Niscayah, both of which have boosted market share and cost synergies. Generally, I am not a big fan of lists, but Stanley Black & Decker is a diverse company with daunting financial statements, so understanding the exact reasons for my bullishness would be helpful. Here you go:

  • At a sub-market price-to-earnings multiple based on next year's earnings, the stock has earnings power derived from impressive acquisition integration, and the modest housing revival is being underappreciated.
  • The Street has lowered its estimates on the company for 2012, reversing a pattern of sustained bullishness since the Black & Decker acquisition. I like the lower hurdle rate against incrementally more positive housing data, and I like what the financials are saying.
  • Stanley Black & Decker in most instances is experiencing no growth in its markets, and sales and earnings are growing through favorable pricing and new product introductions. In the October quarter, amid acute global unrest (48% of the company's business is international), Stanley Black & Decker increased its U.S. organic sales rate by 3%, much better than the downwardly revised GDP print.
  • The company's security business has always fascinated me to no end because of its attractive profit margins and its acquisition-fueled market-share gains. Security has been a soft spot for the company in the recent quarter, as customers have delayed installations. But in its third-quarter earnings report, the company slipped in this statement to signal that the highest-margin part of its business is poised to go on an upswing: "Strong order take in 3Q11 from national and commercial accounts resulted in a significant increase in backlog."
  • Stanley Black & Decker has perhaps the most operationally disciplined management team among the companies I follow intimately.
  • Abating inflation, thumbs up.

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