Stanley Black & Decker (SWK) Up 13.8% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Stanley Black & Decker (SWK). Shares have added about 13.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Stanley Black & Decker due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Stanley Black & Decker Q1 Earnings Surpass Estimates, Fall Y/Y

Stanley Black & Decker reported better-than-expected earnings results for the first quarter of 2020, with a beat of 6.2%. However, the quarter’s sales lagged estimates by 4.6%.

Earnings, excluding acquisition-related charges and other one-time impacts, were $1.20 per share in the quarter, surpassing the Zacks Consensus Estimate of $1.13. However, earnings decreased 15.5% from the year-ago quarter’s $1.42 per share due to a sales decline and weak margins.

Revenue Details

In the quarter under review, the company’s net sales were $3,129.4 million, reflecting a 6.1% year-over-year decline. The results suffered from an 8% decline in volume and 1% adverse impact of movements in foreign currencies, partially offset by 2% gain from acquisitions and 1% positive impact of pricing.

Also, the company’s top line lagged the Zacks Consensus Estimate of $3,280 million.

Stanley Black & Decker reports revenues under three segments. A brief discussion on the quarterly results is provided below:

Tools & Storage’s revenues totaled $2,070.8 million, representing 66.1% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues decreased 9.7% due to a 9% decline in volumes and 2% impact of forex woes, partially offset by 1% gain from positive pricing.

The Industrial segment generated revenues of $590.7 million, accounting for 18.9% of net revenues in the reported quarter. Sales grew 6.4% year over year, primarily driven by 15% gain from acquired assets, partially offset by 8% negative impact of volume decline and a 1% decline from forex woes.

The Security segment’s revenues, representing 15% of net revenues, decreased 3.8% year over year to $467.9 million. Forex woes and divestitures had adverse impacts of 2% each.

Margin Profile

In the reported quarter, Stanley Black & Decker’s cost of sales (normalized) decreased 5.6% year over year to $2,097.2 million. It represented 67% of the quarter’s net sales versus 66.6% in the year-ago quarter. Gross profit (normalized) decreased 7.2% year over year to $1,032.2 million. Gross margin slipped 40 basis points (bps) to 33% due to the adverse impacts of forex and tariff woes, lower volumes, and the pandemic-related increase in manufacturing costs. However, cost control, positive price and margin resiliency partially offset the adverse impacts.

Selling, general and administrative expenses declined 4.9% year over year to $718.7 million. It represented 23% of net sales in the reported quarter versus 22.7% in the year-ago quarter. Operating profits (normalized) declined 12% year over year to $313.5 million, while margin fell 70 bps to 10%.

Adjusted tax rate in the reported quarter was 12.5% compared with the year-ago quarter figure of 15%.

Balance Sheet & Cash Flow

Exiting the first quarter of 2020, Stanley Black & Decker had cash and cash equivalents of $987.1 million, surging 231.6% from $297.7 million recorded in the last reported quarter. Long-term debt (net of current portions) was up 46.8% sequentially to $4,662.6 million.

In the first quarter, it used net cash of $405.2 million for operating activities, reflecting a decline of 6.1% from the year-ago quarter. Capital spending totaled $82.9 million versus $89.6 million in the year-ago quarter. Free cash flow in the quarter was $488.1 million, down 6.3% year over year.

During the quarter, Stanley Black paid out cash dividends of $105.6 million, up 8.2% from the year-ago quarter.

Outlook

For 2020, the company has suspended its projections (on Apr 2) due to the adverse impact of the coronavirus outbreak. Share buyback activities and acquisition for now have been stopped, while actions are being considered to lower capital expenditure. Also, the review of Security has been postponed.

In addition, deleveraging remains a priority for the company. It noted that its solid liquidity position — $1 billion of cash on hand, impressive credit rating (investment grade), $1.7 billion outstanding commercial paper program, $3 billion of revolving credit facilities, and cash generation capability from convertible preferred stock — will help it tide over the difficult environment effectively.

It noted that revenues have declined so far in the second quarter of 2020.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted -74.58% due to these changes.

VGM Scores

At this time, Stanley Black & Decker has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Stanley Black & Decker has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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