This blog is devoted to helping investors make informed decisions. It will be regularly updated and provide opinions on earnings results. It is not intended to give investment advice and should not be taken as such. Consult your investment advisor.
There are three positive earnings drivers to look out for with Stanley Black & Decker( NYSE: SWK),
and if they all come together in 2013, then this stock has significant
upside potential. It is a nice mix of value and growth.The company
offers a nice mix of improving end markets, ongoing cost savings from
synergies created via acquisition integration, and it has a strategic
growth initiative in place in order to drive revenue growth and return
on capital. In this article, I want to look at how these three facets
are playing out so far this year.
End market prospects
The recent results were a mixed bag, as estimates were missed but the
full year guidance for EPS and free cash flow was maintained at
$5.40-$5.65 and $1 billion, respectively. The strength in its mix of
business is undoubtedly coming from its construction and do-it-yourself
(CDIY) segment and it is set to continue. Meanwhile, its security and
industrial segments have more subdued prospects this year.
A breakdown of segmental profits in the quarter.
The results were superficially disappointing. Organic revenue
declined 1% overall, and it was only the 4% contribution from
acquisitions that caused the top line growth of 3%. Moreover, cash
outflows were greater than expected in the quarter and its core CDIY
segment saw flat revenue. It gets worse. Security revenue fell 1% on an
organic basis as did industrial revenue. So, is this a story of
declining organic growth and an over reliance on acquisitions? And where
does the confidence to maintain full year guidance come from?
The 2013 guidance is for mid-single digit revenue growth in CDIY, and
flat to low single digit growth for security and industrial,
respectively. With regards to CDIY, there were three issues of which two look like they will be rectified in due course.
Firstly, there is a late start to the North American outdoor season
which was primarily caused by the weather. Secondly, there has been some
temporary weakness in Latin America due to a variety of reasons.
Interestingly, Whirlpool(NYSE: WHR)said a similar thing
about the region, and in particular with Brazil. Both of these
companies are arguing that this is a temporary setback and Whirlpool
shareholders should take heart from the positive trends expressed for
Latin America in these results. Sequentially, things got better in Q1
and this gives confidence that Q2 will be better for both companies.
The third issue is -- you guessed it -- Europe, but investors need to
recall that comparisons are likely to get easier going forward.
Security’s exposure to Europe is worrying (and there was some temporary
weakness in the Nordic regions), but an extra $15 million of cost
synergies from the Niscayah acquistion are expected. This should help
out margin growth. It’s a similar story with industrial where moderate
U.S. growth is hopefully going to offset weaker conditions in Europe.
Another company displaying confidence in the North American outlook is Masco(NYSE: MAS).
This is more of a leveraged play on new housing construction, and its
margin expansion and operational leverage opportunities will come from
new builds, but its repair and remodeling market is also expected to
grow moderately. Frankly, I think the latter tends to key off the
former, and as long as there is good turnover in housing, then prospects
will get brighter for all the companies discussed here.
Acquisitions working well
The scorecard over its acquisition strategy over the last few years
is positive. It has been a difficult few years for housing and
construction related stocks, but I think it has done the right thing in
trying to drive cost synergies with its acquisitions. As discussed
above, there is an extra $15 million to come from Niscayah (security)
which should bring the total for 2013 to $50 million, and management is
currently evaluating the potential for increasing the targets for 2014.
Strategic growth initiative
I’ve haven’t got the room to discuss this in great depth here, but investors wanting more color on this can find it in an article linked here.
A graphical summary of the plan to increase revenue by $850 million
and profit by $200 million within three years is shown below.
Its early days, but the plans were declared as being ‘on track’.
Indeed there was a bit of extra investment in this program although
there was no adjustment to the targeted CapEx/Revenue figure of
2.5%-3.5%.
The bottom line
This is an attractive proposition and if it can hit its $1 billion in
free cash flow, then the stock would be generating nearly 6% of its
enterprise value (based on the current share price of $77). This is
cheap for a company expected to grow revenue in mid-single digits and
earnings in the mid teens for the next few years.
Ultimately, investors will have to price in the uncertainty that it will hit these targets. If
you are positive on the global economy, then this stock is going to
give you some upside potential and I think a target price in the mid
$80’s is not unreasonable. A good GARP candidate.
No comments:
Post a Comment