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Why Is Stanley Black & Decker (SWK) Down 8.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Stanley Black & Decker (SWK). Shares have lost about 8.1% in that time frame, underperforming the S&P 500.

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

Stanley Black & Decker Beats Q1 Earnings Estimates, Ups View

Stanley Black & Decker has reported better-than-expected results for the first quarter of 2019. This came in after it recorded in-line results in the previous quarter. The company beat earnings estimates by 19.3%. Further, sales beat estimates by 0.9%.

Earnings, excluding acquisition-related charges and other one-time impacts, were $1.42 per share, surpassing the Zacks Consensus Estimate of $1.19. Also, earnings increased 2.2% from the year-ago figure of $1.39 per share, driven by healthy sales performance, solid operational performance (negated the impact of $160 million or 90 cents per share of external headwinds), tax benefits and lower share count.

Tools & Storage and Industrial Segments Drive Revenues

In the quarter under review, the company's net sales were $3,333.6 million, reflecting 3.9% growth over the year-ago quarter. This improvement was primarily driven by 3% rise in volume, 2% positive-price impact and 3% gain from acquired assets. These were partially offset by 4% adverse impact of unfavorable movements in foreign currencies.

Also, the top line surpassed the Zacks Consensus Estimate of $3,310 million.

Stanley Black reports revenues under three market segments. A brief discussion of the quarterly results is provided below:

Tools & Storage's revenues totaled $2,292.3 million, representing 68.8% of net revenues in the quarter under review. On a year-over-year basis, the segment's revenues grew 3.5% on the back of 5% gain from volume growth and 2% from favorable pricing, partially offset by 4% adverse impact of currency movements.

The Industrial segment generated revenues of $555 million, accounting for roughly 16.6% of net revenues in the reported quarter. Sales grew 10.1% year over year, primarily driven by 16% gain from buyouts of Nelson and IES Attachments, partially offset by 3% negative impact of foreign currency woes and 3% from volume decline.

Revenues from the Security segment, representing roughly 14.6% of net revenues, decreased 0.6% year over year to $486.3 million. Gain of 2% from acquisitions (commercial electronic security) and 1% favorable impact of pricing actions were more than offset by 4% adverse impact of foreign currency woes.

Commodity Inflation, Forex Woes & Tariffs Hurt Margins

In the reported quarter, Stanley Black's cost of sales increased 8.8% year over year to $2,221.6 million. It represented 66.6% of the quarter's net sales versus 63.6% in the year-ago quarter. Gross margin slipped 300 basis points (bps) to 33.4% as commodity inflation, adverse currency impact and tariffs negated positive impacts of volume growth, favorable pricing and improved productivity.

Selling, general and administrative expenses decreased 1.7% year over year to $755.9 million. It represented 22.7% of net sales in the reported quarter versus 24% in the year-ago quarter. Operating profits declined 10.6% year over year to $356.1 million, with a year-over-year decline of 170 bps in the margin to 10.7%.

Adjusted tax rate in the reported quarter was 15%, down from 23% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the first quarter of 2019, Stanley Black had cash and cash equivalents of $281.8 million, down 2.4% from $288.7 million recorded in the last reported quarter. Long-term debt (net of current portions) was up 2.3% sequentially to $3,909.4 million.

In the first quarter, the company used cash of $431.3 million for operating activities, higher compared with $349.4 million used in the year-ago quarter. Capital spending totaled $89.6 million versus $106.3 million in the year-ago quarter. Free cash outflow in the quarter was $520.9 million, higher than $455.7 in the year-ago quarter.

During the reported quarter, the company paid cash dividends of approximately $97.6 million.

Outlook

In the quarters ahead, Stanley Black anticipates gaining from a growing recognition for its brands — Craftsman, Lenox, Irwin and DeWalt FlexVolt. Further, business expansion in emerging markets, innovation and favorable e-commerce trends will be beneficial.

Further, the company anticipates gaining from pricing actions and $250-million cost-reduction initiatives. It noted that it intends on starting multi-year initiatives aimed at margin expansion. Also, transformational activities as well as efforts to develop electronic security solutions and focus on building commercial resources will be beneficial.

For 2019, the company increased adjusted earnings projection from $8.45-$8.65 to $8.50-$8.70 per share. The revised guidance reflects year-over-year growth of 4-7%. Organic growth will be approximately 4%, including the impact of mid-single-digit growth in Tools & Storage, low-single-digit increase in Security and modest decline in Industrial. It is worth mentioning here that the company earlier predicted flat results for the Industrial segment.

The impact of the IES Attachments buyout and divestiture of Sargent & Greenleaf are predicted to be neutral on earnings. Also, external headwinds will have an adverse impact of $340 million (forex woes are predicted to have an incremental adverse impact of $20 million).

Free cash flow conversion is predicted to be roughly 85-90%.

For the second quarter of 2019, the company predicts earnings of roughly 29.5% of the yearly projection.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Stanley Black & Decker has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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