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Can Stanley Black & Decker Overcome Strong Headwinds in Q1?

By Rich Duprey – Apr 23, 2019 at 1:30PM

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A lot of external forces have built up against the toolmaker, and they could limit growth.

Rising interest rates dogged Stanley Black & Decker (SWK -1.62%) for the past two quarters, roiling markets like housing and automobiles, and impacting tool sales. But the toolmaker was also buffeted by currency exchange rates, rising commodity costs, inflation, and the lingering effects of tariffs from the ongoing trade battle.

Stanley is scheduled to report first-quarter earnings on Wednesday, April 24. Despite its stock tumbling 15% in one day following its fourth-quarter earnings release, when investors were spooked by weak guidance for the year, shares have regained all that lost ground and more. It now trades some 6.5% higher from where it was before its fourth-quarter earnings.

Let's look at how Stanley's first-quarter results might turn out and what that could mean for the rest of the year.

Man using Black & Decker chop saw

Image source: Stanley Black & Decker.

The long term is still looking up

From a macroeconomic perspective, the situation might be improving. The Federal Reserve elected to not raise rates at the end of the third quarter, the second straight quarter it has held the line, and signaled it won't raise rates for the rest of the year.

While the automotive industry had a rough first quarter as sales fell year over year nearly across the board, and 2019 totals are expected to be lower than 2018, some automakers think the coming year will be a good one nonetheless. The housing market may also improve as mortgage rates have pulled back from the highs they hit late last year, causing builder sentiment to become more upbeat.

Unfortunately, foreign currencies, commodities, and tariffs look immutable for the time being. Stanley, though, was able to offset almost all of the higher expenses it experienced through cost-cutting initiatives and price hikes. It noted last quarter that such costs had grown from its initial estimates of $150 million to $370 million, but it had been able offset all but $50 million of that through trimming costs and raising prices.

Despite the headwinds, the toolmaker still posted adjusted EPS growth of 9% last year on an 8% increase in revenue, 5 percentage points of which was organic.

The near term: not bright

Those gains are not going to extend to the first quarter, however, as CEO Jim Loree said the "elevated levels of external headwinds, particularly in tools," were going to be weighted toward the first six months of the year, with first-quarter earnings to be only about 13% of the full year's total, or some 400 basis points below last year, because of those limiting factors.

Operating margins are also expected to contract for the year, particularly in the first quarter. Even with costs weighted toward the first half the year, operating margin is still expected to be positive, and management forecasts sales will grow.

Stanley also recently sued Sears for allegedly breaching their agreement over the sale of Craftsman tools in early 2017. The $900 million pact gave Sears a limited license to sell some Craftsman products, but the retailer launched a new mechanics line that is being sold as coming from Sears, "the real home of the broadest assortment of Craftsman," which Stanley argues de-legitimizes the Craftsman tools that Stanley sells at other retailers.

Stanley continues to roll out its own Craftsman line, and in the fourth quarter it drove approximately 2 percentage points of the 7% gains achieved in organic revenue growth for the tools and storage segment, net the effects of cannibalization. It maintains that customer reaction to the brand remains both positive and strong.

Delayed gratification

Despite the recovery Stanley's stock has made over the past three months, the first quarter may be rough, and only slightly less so by the second. Some relief may come in the back half of the year, however.

With the Fed deciding to hold the line on interest rates, that may allow housing and autos to pick back up, which could provide a long-term benefit to the toolmaker.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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