Embracing change in one's personal life and business career is very difficult. Once you become comfy in a particular surrounding or relationship, a kind of "if it ain't broke, don't fiddle with it" mindset tends to set in.
I am having trouble dialing it down a notch in analyzing the 50 or so companies I had coverage on at my old firm. These 50-plus companies offer invaluable insight into the global economy, and I look to them as a great resource to assess where the broader equities market is heading. After years of reading corporate commentary and figures from these companies, I have developed the ability to spot when one of them is sick -- or taking the ball and running hard into the end zone. Today, I want to briefly touch on Stanley Black & Decker (SWK).
This "best of breed" name is trading off of its 52-week high and on a valuation below the likely future earnings power of the business (earnings continue to surprise to the upside). Here are the reasons underlying this assessment:
- Growth in sales is significantly outpacing market growth trends, owing to share gains and new product introductions. Seeing this materialize provides comfort in Black & Decker's acquired product pipeline and the management team's skill in churning out new products while integrating new businesses. Furthermore, it tells me the combined sales teams are doing what they are supposed to, utilizing the leverage of this mega industrial company to sell more products to customers (despite a customer desire to keep inventories lean).
- Management has been quite realistic in its fiscal-year 2012 expectations, and perhaps even conservative on North America (+1% organic growth) and emerging markets (+10% to +15%). Realism was crafted into the European outlook for fiscal-year 2012 (-3%) and was evident in management's fourth-quarter commentary ("softer" sales in Europe noted, and a tougher tone than in the third quarter). Given how housing permits (February was the strongest since October 2008) and existing home sales trended in the first quarter, and seeing a strong pre-announcement by Sherwin-Williams (SHW), there is a good probability that Stanley will beat earnings expectations handily for the first quarter and move fiscal-year earnings guidance higher. It is currently at $5.75-$6.00 per share.
- Stanley is a free-cash-flow machine, projecting $1.2 billion in fiscal-year 2012 ; should fiscal-year 2012 earnings guidance be raised, plus accounting or continued improvement in inventory turns (solid three quarter trend here), it should only bolster the free cash outlook for the year. Stanley has alluded to a "meaningful" increase in the dividend sometime this year, and it could happen shortly as a way to re-energize the stock price (last year the company increased its dividend by 21% in February).
- I don't know where there is left to trim fat, but Stanley continues to find areas to cut costs and expenses. I think a portion of cost synergies will be realized from the Niscayah acquisition this year on top of efforts organization-wide, but either way, there is a nice buffer to the operating profit line.
If Stanley Black & Decker did suffer any hiccups in the first quarter, look for it to show in gross margin, which has fallen short of consensus for three consecutive quarters, and in its European growth outlook. Overall, I am expecting the company's cost-and-revenue synergy along with its free cash flow to hold greater weight with investors.