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The Real Reason Stanley Black & Decker Stock Slumped 20.4% in October

By Neha Chamaria - Nov 12, 2018 at 4:22PM

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The industrial tools company is gearing up for a challenging 2019, so beware.

What happened

As a pure play in industrials, Stanley Black & Decker ( SWK -5.10% ) couldn't escape the October bloodbath in the sector. Shares of the tool manufacturer dropped 20.4% last month, according to data provided by S&P Global Market Intelligence, hitting its lowest point in the year so far.

While macroeconomic concerns are partly to blame, Stanley's weak quarterly numbers and guidance for the full year, announced on Oct. 25, further fueled fears of a slowdown in the company's business. Long-term investors seem to have found an opportunity somewhere, as the stock's up almost 5.5% so far in November, but the volatility even as I write this is unmistakable.

So what

The market knew tariffs and foreign currency translations are headwinds for Stanley, but it didn't foresee the deep impact they would have on the company's operations.

Stanley's third-quarter revenue growth of 4% was pretty much in line with estimates, but net income slid nearly 10% to $247.8 million, thanks to a pre-tax charge of nearly $135 million related to higher input costs, tariffs, and currency fluctuations.

A dismayed man with a falling stock price chart in the background

Image source: Getty Images.

The unexpected hit compelled management to initiate a slew of cost-cutting moves and downgrade its outlook for the full year, triggering fears among investors that growth ahead could be difficult to come by. In fact, CFO Donald Allan Jr. didn't mince words: "As we shift to 2019, we are now preparing for the carry over effect of the 2018 headwinds," he said. That was enough to send investors scurrying for cover.

Now what

Stanley now expects to book a pre-tax restructuring charge of around $125 million in the fourth quarter; it therefore trimmed its GAAP earnings outlook for 2018 to between $5.90 and $6.00 per share, from a range of $7.00 to $7.20. Even at the higher end, that would mean an almost 13% decline in earnings per share from 2017.

To be fair, Stanley expects cost-cutting to save it nearly $250 million in 2019, but that might fail to show up on its bottom line if demand slows and input costs inch higher. We can't rule out the possibility if the trade and tariff wars intensify.

Moreover, it remains to be seen whether management's plans to pass on some of the costs to consumers, by hiking prices, succeeds in boosting revenue -- or falls flat on its face by hurting sales. Let's hope it isn't the latter, or Stanley will have to work even harder to convince shareholders of its growth prospects.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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