SWK

Stanley Black

$
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
.
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9

-$105.97 -58.19%
Today $ALLE Is Boring But Tomorrow It Might Be Exciting
Doors & locks have been around for thousands of years as a valued tool to maintain our privacy and protect our personal property. Allegion is a company that focuses on access control security products and solutions, with their brands sold in 120+ countries.

Allegion is a notable player in their end market but it has been such a boring investment the last few years. Tepid revenue growth and little evidence they are on a path to sustainable margin expansion. Over the years they have reduced share count and reduced debt but what will excite investors moving forward?

Adoption of Smart doors & locks should be the catalyst for margin expansion. We have a history of really steady margins, essentially 19-20% EBIT margins every year. Smart doors & locks introduces the possibility to layer on high margin recurring software revenue to the existing business.

Allegion recently completed an acquisition from $SWK for their commercial door division, which includes ~ 130m of annual recurring service revenue (recurring revenue is the very thing that would make Allegion an exciting business).

$LTCH has done a great job of highlighting the value proposition of digitizing doors for property managers and residents alike. I think it's possible to look at Allegion today & co-opt the Latch investment thesis. At their core $ALLE is hardware company trying build out/acquire software while Latch is a software company trying to build hardware or partner with hardware producers.

There are a number of macroeconomic headwinds facing the company but from a historical perspective the company is trading at a low valuation. If you believe in the potential of smart doors & locks then Allegion may be an attractive way to bet on the continued growth of the Smart Home/ Smart Workplace.
post mediapost media
Stanley Black & Decker, Inc. $SWK
1. Is the company undervalued?
EV/EBIT: 16.59
EV/Sales: 1.53
Price/Book: 1.66

$SWK trades around a market multiple, while growing at a nice clip and returning significant capital back to shareholders. With that said there are near term issues which are expected to bring down profitability over the next few quarters. This opens up an opportunity for long term investors, as the company is objectively cheap if they can get back to their historical margin profile.

Link to full write-up here:

Weekly Market Recap
I write weekly market recaps on my website, click here to read the full article and continue downward for the recap!

"I’ll be the first to say I’m relieved that it is the weekend after how exhausted the market made me feel this last week. We had a huge week of news that was ultimately matched with some big gains for the week that padded the upside for the month of July. These gains were driven in part by short-covering activity and capital going back into equities following the worst first half of a year in decades.

Nearly 200 companies reported their earnings results for the June quarter, the FOMC held their July policy meeting, the economic calendar featured the Q2 GDP Report, President Biden held a call with China’s President Xi Jinping, Senator Manchin surprised all with a reversal of position and reached an agreement with Senator Schumer on the provisions for the Inflation Reduction Act of 2022, and Congress passed a $280 billion bill designed to increase the country’s competitiveness with China ($52 billion of this goes directly to semiconductor manufacturing capacities). Whew, was that a run-on sentence?

This week we saw weakening consumer spending across the board highlighted with a handful of earnings and data releases. The PCE Price Index showed the highest year-over-year reading since 1982 at a reading of 6.8%. We also saw the 3rd straight drop in consumer confidence and a weak New Home Sales report for June. For earnings, we saw warnings from Walmart ($WMT) that highlighted fuel and food inflation decreasing spending on general merchandise, Best Buy ($BBY) warned of further softening in demand for consumer electronics, and Stanley Black & Decker ($SWK) also warned of general weakening consumer demand.

Seems like a lot of bad news for consumers, but it did not shake the market. Investors were laser-focused on better-than-expected results and/or guidance from big tech ($GOOG, $MSFT, $AAPL, and $AMZN). A market drop in Treasury yields and the idea that weak economic data would steer the Fed away form an overly aggressive path on future rate hikes kept the market strong.

The Fed was key to this week’s action. It raised the fed funds rate on Wednesday by 75 basis points as expected. Chair Powell, did an applaudable job at his press conference afterwards, walking a fine line between needing to be tough on inflation while also conceding that the pace of rate hikes are likely to slow. He didn’t rule out another 75-point hike at the next meeting, claiming that the data would dictate the decision, indicating that the guidance from the Fed that we have become used to is likely to slow or stop. Expect data to be the leading factor in how policy is decided now on a meeting-by-meeting basis. This effective step-down from an aggressive rate hike approach was enough to rally the market post meeting on Wednesday that continued through the end of the week.

According to the CME’s FedWatch tool, the futures market is pricing in two rate cuts in the first half of 2023. I don’t believe Powell said anything that supports this thesis.
Despite seeing the 2nd consecutive negative quarter of GDP (-0.9%), All 11 sectors of the S&P 500 ended green this week ranging from 1.6% to 10.3%, led by the energy sector. All sectors ended the month positive as well ranging from 3.1% to 18.9%, led by consumer discretionary. A rally in Tesla and Amazon forged the way for these gains for the consumer discretionary segment which is still down 20.4% for the year. Overall, all major indices were up for the week and the month.

Next week is fairly mild on potentially impactful items in the economic calendar. We have some PMI and employment numbers to look forward to.

My bearishness on the last week was incorrect, however I’m sticking with the bear mindset for the short to medium-term. The Fed may have reached the levels at which they want to maintain rates, however, I believe the economic effects of the previous increases that got us to these levels have yet to fully felt. The effects of rate hikes take time to materialize and the economic data that we watch is often a month or even a quarter behind. I find it hard to believe that the highest levels of inflation in recent decades are not going to simply disappear in two quarters. The current market seems overly optimistic in my opinion.

Maybe I’ve just been spoiled by buying so many cheap dividend stocks in this market that I want things to stay bearish! Regardless of the way things move, we will buy structurally sound companies that pay safe dividends and have a promising future. We did this last week with some buys in $INTC and $CMCSA to name a few. Read the portfolio update here."
PCE Deflator, More Earnings: Daily Contrarian, July 29
Good morning contrarians! Stocks look to resume their rally after positive earnings from $AAPL and $AMZN

Today’s main economic data release is the PCE deflator, out at 0830. Economists expect a 6.8% increase to the headline figure, which is ahead of last month’s 6.3%. The core figure, which excludes food and energy, is expected to increase 4.7%. That would be identical to last month’s number.

Watch for: A small increase is baked in to the headline figure. So don’t believe any headlines that say it rose “unexpectedly.” But the core figure is more important anyway.

Earnings include $XOM, $LYB, $CVX, $NWL, $CL, $CHD, $PG, and $PSX.

Am monitoring $SWK after it dropped 16% yesterday. More on this in the podcast, available here:
My "buy the dip" pick is Stanley Black & Decker $SWK
When people hear the name "Stanley Black & Decker", people commonly associate it with power drills and other hand tools. But for those that love dividend aristocrats, dividend champions, and dividend kings, Stanley Black & Decker is a stock you might be interested in.

$SWK has raised its dividend for 54 consecutive years. Its current dividend (at the time of writing) is 2.91% and its PE ratio is 13. For perspective, this dividend yield is much higher than what the stock normally offered investors in the stock market for many years.

Source: macrotrends

Meanwhile, its PE ratio is near a historic low.

Source: macrotrends

Stanley Black & Decker's business is both B2B and B2C. Their primary products are power tools. For this memo, we will be focusing more on the B2B aspect of the business since that's where the company will be sourcing most of its growth from. Outside of that, they sell outdoor power equipment and industrial equipment, and fasteners (aka bolts). Since the majority of its revenues are from the US, for this memo, we will focus on the economic conditions of the US.

The business is closely tied with the construction industry. With more construction spending, there are more construction projects and thus more demand for power drills. According to FRED, construction spending as a whole in the US continues to grow year over year.

Some of the rise in construction spending can be attributed to inflation and the extra costs that came with supply chain issues. Importantly, most of the growth isn't driven by public construction spending, but rather, private construction spending.

Regarding public construction spending, since the start of COVID, the US government has been spending less on construction because they had to allocate more resources towards unemployment and economic stimulus. As we've gotten past COVID, the government is looking to boost infrastructure spending to sustain economic growth.

As for private construction spending, despite COVID, spending has continued to soar. This is good because it shows that the private sector has optimism about the future. At the same time, this is bad because if a recession does happen, then construction spending from the private sector would plunge.

Overall, with growth in construction spending, Stanley Black & Decker is expected to continue seeing demand for its power tools grow throughout this year.

Outside of Stanley Black & Decker's main business, the company has other growth catalysts.

One of the biggest growth catalysts that Stanley Black & Decker has is the rapid rebound of its industrial business. This business division sells tools, equipment, and fasteners to factories. Looking at the industrial production levels in the US, the months of April and May have seen record industrial production for the US and with that, it's assumed that the trend will continue.

Stanley Black & Decker benefits from the growing demand for vehicles. With a massive car shortage (that's starting to look like its ending) and the immense demand for electric and hybrid vehicles, Stanley Black & Decker will see its income from its industrial business grow.

According to their recent investor presentation:

Stanley Black & Decker makes money on nearly every car produced globally through the sale of its fasteners. For those that are wondering what a fastener is, here's a screenshot of what they are (credit: Google)

In short, fasteners bring immense recurring sales for Stanley Black & Decker. As more cars are produced, Stanley Black & Decker is producing and selling more fasteners to them. This can also be applied to many other items that are produced in factories like washing machines, furniture, etc. $SWK directly benefits from a rise in industrial production.

And speaking of growing demand for electric and hybrid vehicles, according to their investor presentation, Stanley Black & Decker sees their profits from each vehicle produced to double to even sextuple! The reason being is that electric and hybrid vehicles require more fasteners than traditional ICE vehicles, even though ICE vehicles come with more moving parts.


For the ESG crowd, Stanley Black & Decker is a fantastic ESG stock pick. There's more to the business that looks ESG friendly than the fact that they provide fasteners to electric and hybrid vehicles.

Being in the outdoor power equipment market, Stanley Black & Decker is benefiting from the growing demand for electric lawnmowers and leaf blowers. If every state does choose to enact the ban on the use of gas-powered lawnmowers and leaf blowers, Stanley Black & Decker will see immense demand for their outdoor power equipment. But for now, it looks like policymakers will focus on banning the sale of gas-powered outdoor power equipment. California made a law that would ban the sale of gas-powered lawnmowers and leaf blowers after 2024. More states could follow California as the emissions that come with gas-powered outdoor power equipment are immense.

With all the uncertainty looming around in investors' minds over issues with food, energy, war, supply chains, inflation, etc. investors during these times want to put their money on management teams that they can depend on to guide them through the gas and make them money. Stanley Black & Decker has demonstrated that quite well over the past several years.

From their investor presentation, management has shown that despite hard times, they have been able to maintain or even increase their Return on Operating Assets. Over the years, management has been able to boost the efficiency of the use of their assets.

And don't forget that despite the macroeconomic issues that management had to go through, they've continued to raise their dividends. Revenues may have dropped in some years, but those drops were temporary.

When looking at the changes in Stanley Black & Decker's executive team, sure, the company has undergone a couple of changes throughout those years, and despite having different management teams, the business has shown its resilience. The business has been able to improve its efficiency despite the adversity of the macro environment.

Another thing to note is that during this year, Stanley Black & Decker has sold two non-core businesses. For their security business, they sold it for $3.2 billion. As for their automatic doors business, they sold it for $900 million. By selling these businesses, Stanley Black & Decker will be seeing immense growth in their cash balances once the sale of these businesses gets completed. At the same time, selling these businesses makes management more focused on their core businesses, which is something investors love.

In sum, I believe that sooner or later, the market will see Stanley Black & Decker favorably because the business has directly benefited from the growth in construction spending as well as industrial production. Also, since the majority of the company's sales are in the US, investors will feel better about investing in Stanley Black & Decker compared to a business that sources most of its sales from the international markets because the economic situation in the US is much better compared to the economic situation in Europe and elsewhere.

And finally, $SWK directly benefits from the world's push towards reducing emissions. Its newest products will appeal to both regulators (who want to reduce emissions) as well as consumers (who want to be able to comply with the regulations while also getting a better tool). At the same time, many of the innovations that other companies are making that relate to promoting the environment (like automakers and electric/hybrid vehicles) will be needing more fasteners from Stanley Black & Decker.
post mediapost media
Lovely pitch, have been playing with the idea for a while but never dove too deeply into the company. Some points I came across while quickly putting the stock through my koyfin screens:
(WACC sadly isn't available in koyfin I think so starting off with gurufocus) SWK has quite high weighted average cost of capital at 8.98%, while only generating returns on invested capital of 7.23%. The general rule of thumb is that a company should have ROIC exceeding WACC by at least 2%. ROIC has been trailing between 5-9% for decades.
Post media
My balance sheet health screen always rather disappointing: The company holds over $10 billion in net debt or a Net Debt/EBITDA ratio of 4.2. The company has hardly any cash on hand and to sum it up has a very low Altman-Z-Score.
Post media
Free Cash Flow is seasonally weak in the april quarter, but this last quarter it was extremely weak, at negative $9.15 FCF per share.
Post media
After looking into the numbers I am kind of concerned if the company still can manage to compound well into the future. What do you think about the points I raised?
View 11 more comments
New Lows Today @ 10am
Visit highsandlows.substack.com to see more
post mediapost media
Stanley's avatar
$18.6m follower assets
First stock trades for May, 2022 - $FIGS (dca down from IPO), $SWK (dca down from initial purchase), $SCHD (purchase from accumulated dividends).

What’s on your plate today?
Largest Market Caps >> New Lows
There are some brutal charts out there. Many of them are the largest and most well known companies in the world. Here are some of them:

Visit highsandlows.substack.com to see more
post mediapost media
Next

Longest holders

Commonstock is a social network that amplifies the knowledge of the best investors, verified by actual track records for signal over noise. Community members can link their existing brokerage accounts and share their real time portfolio, performance and trades (by percent only, dollar amounts never shared). Commonstock is not a brokerage, but a social layer on top of existing brokerages helping to create more engaged and informed investors.