Stanley Black & Decker (NYSE:SWK), a seemingly boring industrials stock, has rallied by an astounding 106.5% since bouncing off its March lows. The market doesn't seem to care that the COVID-19 pandemic has thrown a monkey wrench into the tool manufacturer's growth plans, and that it's even suspended its share repurchase program to preserve cash. That sounds like a dire situation, but what if there's more than meets the eye here?
COVID-19 pandemic: The bad and the good
The coronavirus outbreak and ensuing economic slowdown has undeniably hurt demand for Stanley B&D's products. Sales from its primary and largest segment -- tools and storage -- dipped 16% year over year in the second quarter, pulling down the company's total quarterly sales to $3.1 billion. Demand for commercial and industrial tools was hardest hit, although retail and home tools were in high demand. That's just one of the positive trends currently in play, as CEO James Loree revealed during the company's second-quarter earnings conference call:
And while this pandemic has created an incredibly challenging time for all of us, it has also cast a new and very positive light on our portfolio as three powerful trends have emerged, which worked to our significant benefit. First, there's the sudden acceleration in the shift to e-commerce, and then there's a reconnection with the home and garden and a trend toward nesting and DIY; and thirdly, a newfound societal obsession with health and safety, reimagined security.
Evidently, the stay-at-home culture fostered by the COVID-19 pandemic has reignited demand for do-it-yourself and home improvement products, which bodes well for Stanley B&D, the world's largest tools and storage company and among the largest manufacturers of engineered fasteners and security systems.
To capitalize on the three trends Loree emphasized, Stanley B&D wants to prioritize e-commerce and plans to expand its e-commerce reach into geographies with limited presence. It's a prudent move, given that e-commerce made up 15% of the tools and storage segment's Q2 revenue.
More importantly, management is laser-focused on costs to maintain margins during these challenging times.
A massive acquisition in the pipeline
While Stanley B&D doesn't have any long-term debt maturing until the end of 2021, it has cut short its capital expenditure budget and suspended merger-and-acquisition (M&A) and share-repurchase plans for now to preserve cash. This is over and above the $1 billion cost-reduction program that the company initiated in April. It expects to realize $500 million in savings in 2020.
Stanley B&D is a highly acquisitive company, having invested nearly half its capital into M&A activity over the years while returning the other half to shareholders. For example, it acquired Consolidated Aerospace Manufacturing, a manufacturer of specialty fasteners and components for aerospace and defense, earlier this year to enter the aerospace market. Then in July, the company increased its dividend for the 53rd straight year, confirming its commitment to shareholders.
That's not to say Stanley B&D is scrapping all plans to grow via acquisitions. On the contrary, the positive trends triggered by COVID-19 have encouraged management to identify some "supercharged growth initiatives," including the acquisition of the remaining 80% of MTD Products that it doesn't hold.
MTD is a private manufacturer of outdoor power equipment such as lawn tractors, mowers, chain saws, and utility vehicles. Loree says the company could probably acquire MDT in early 2022 and expects the acquisition to contribute $3 billion to $4 billion in incremental annual revenue beginning in 2022. That would be a massive addition to Stanley B&D's portfolio, and I wouldn't be surprised to see the company make the move as early as mid-2021, given its strong liquidity position.
So should you invest in the stock now?
Stanley B&D clearly has its long-term growth blueprint in place. Up until March, management even stuck to its long-term financial goals: including:
- 4%-6% organic growth.
- 10%-12% revenue growth.
- 10%-12% earnings-per-share growth.
- Generation of free cash flow greater than net income.
I believe the company's capable of hitting those goals and richly rewarding shareholders, so any hiccups in its near-term operational performance shouldn't detract investors. In other words, Stanley B&D is a great stock to buy if you're a long-term investor.
Of course, the stock's recent run-up has driven most of its valuation metrics above five-year averages, even as 2020 could still be a choppy year for Stanley B&D, so you might want to wait for a price drop to scoop up some shares. Just don't miss the opportunity when it comes along, because this one's a great stock to own, for growth and income investors alike.