This Company Is a Solid Bet
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Stanley Black & Decker (NYSE: SWK), a manufacturer of industrial tools, household hardware and engineered-security solutions across the globe, recently reported its second-quarter earnings. The results provided many reasons to cheer. It beat estimates on revenue and also met the expectation on earnings per share. Let's take a look at what was behind its performance in the recently reported quarter and how it could perform in the future.
GAAP earnings per share expanded significantly from $1.13 in the year-ago comparable quarter to $1.23, beating the consensus estimates of $1.19. The revenue stood at $2.9 billion, which was an 11.8% increase year-over-year besides beating the consensus estimates by more than $50 million.
A bird’s eye view of the entire operating results reveal that growth in volumes and acquisitions contributed 6% and 7% to performance gains, respectively; these two together facilitated in offsetting a 1% loss due to unfavorable pricing. Gross margins, however were down 100 basis points to 35.4%, primarily due to higher cost of sales. The earnings out-performance can be attributed to a very healthy performance in the company's three segments. Let’s take a look at the performance of these groups.
The construction and do-it-yourself (CDIY) segment’s revenue grew 8.6% to $1.4 billion, and profit moved up 5% to $219 million as compared to the year-ago quarter. CDIY's share in revenue was 50.4% in the second quarter. The security segment, which accounted for 21.3% of revenue, witnessed year-over-year growth of 1.6%. The industrial segment was the pick of the lot in terms of revenue growth, and increased 28.1% to $812.8 million.
The company is on course to achieve organic growth to the tune of $850 million in incremental revenue and $200 million in incremental margin in the next three years.
The way ahead
The company’s future looks bright. It has completed the acquisition of GQ, the number-three power-tools company, and this will provide the additional leverage for expanding its base in Asia and emerging markets as far as mid-price-point markets are concerned.
Stanley hopes to build further on the momentum in emerging markets, where it performed well in the quarter with Russia up 31%; China, 24%; South East Asia, 13%; Middle East, Africa 15%; Latin America up 15%. As a result, the future is looking really good, and the company estimates that these initiatives alone will contribute 2% to annual growth in the current fiscal year.
The company is also expected to achieve at least eight working capital turns while aiming for 10 working capital turns by 2015 through 2016. Already, compared to the year-ago quarter, it has lowered the inventory days from 78 to 72. The company is determined to be on the target that it has set for itself for the year 2015 through 2016.
Stanley is aiming for 4% to 6% organic growth annually and is projecting a three year period for this. It appears that the company is already on the right course. In a nutshell, the company is aiming for growth on an ongoing basis irrespective of the economic environment and remains agile enough to attempt that going forward.
Next year's average estimate for revenue is $11.0 billion, and the average EPS estimate for the next year is $5.44. So, the future of the company looks quite encouraging.
A look around
Competition in any sector is always good for the end user, and Stanley Black & Decker, like any other company, is not devoid of its share of competitors. The two that it has to keep a watch on are Kennametal (NYSE: KMT) and Snap-on (NYSE: SNA).
Kennametal is a supplier of high-speed metal cutting tools, tooling systems, wear-resistant parts, and cemented tungsten carbides, to name a few products. For the June quarter, revenue and EPS were in line with expectations and estimates.
Going forward, analysts expect that Kennametal will increase its gross margin from 32.6% in fiscal '13 to 34.6% in fiscal '14. In addition, the EBITDA margin, which currently is 15.2% in '13, is expected to grow to 17.2% in '14. Kennametal is a cash-rich company where, at the end of the last quarter, the cash balance jumped nearly 400% year-over-year to $377 million.
It is, however, currently facing a tough environment and had acquired Stellite last year to strengthen its footprint in energy and power generation. It also acquired Emura recently, and this should again make Kennametal's tungsten deriving sources stronger. But investors should consider the weakness that the company is facing due to soft demand in infrastructure and industrial end-markets.
Snap-on has one segment where it manufactures air power tools, air power tool accessories and electric power tools, which compete with equivalent product offerings from Stanley Black & Decker. Snap-on reported second-quarter EPS of $1.50, which beat consensus estimates of $1.43 by 9%. This was higher by 15.4% from the prior-year quarter’s earnings of $1.30.
The company reported revenue growth in three of its four segments, with the tools segment witnessing both 6.5% year-over-year growth to $346.2 million and a jump of 7% in organic sales.
The company also maintained that it would stay focused on emerging markets besides continuing its efforts to increase margins by focusing on what it calls the “Snap-on value creation” process. In addition, it also wants to keep expanding in mobile tools and vehicle-repair garage markets, which are bound to grow as more and more vehicles hit the road.
Stanley Black & Decker is a company that is committed to growth and is financially disciplined. It’s going to be one of those stocks that does not need to be looked at daily, and should offer good returns in the long term.
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ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Kennametal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!