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Is Stanley Black & Decker Stock a Buy?

By Reuben Gregg Brewer - Mar 31, 2021 at 9:00AM

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Great companies generally command high prices. But how high is too high?

Stanley Black & Decker (SWK 0.26%) is something of an iconic industrial stock, with a collection of hardware brands that most people know, if not use. There's a lot of reason to like the company and its future. But that doesn't mean you should like the stock.

Here are some things to consider before you buy shares of this tools and hardware manufacturer.

Stanley Black & Decker 2020 performance was not bad at all

Last year was marred by the COVID-19 pandemic, which led countries around the world to shut their economies. The goal was to slow the spread of the coronavirus, but it was a major blow to economic activity. So, when Stanley Black & Decker reported that full-year sales in 2020 were up a scant 1%, it's hard to get too upset. Adjusted earnings, meanwhile, were up 8%, which is actually quite respectable given the backdrop. Notably, growth in the second half of the year and acquisitions helped offset the hit from the early days of the pandemic.   

A tool box with tools.

Image source: Getty Images.

This is why the fourth quarter of 2020 is such an interesting one to look at. In the quarter, year-over-year sales at Stanley Black & Decker increased 19%. Earnings were higher by roughly 50%. The company ended a difficult year on a very strong note, suggesting that the pandemic hit was truly a temporary setback.   

Looking forward, meanwhile, management is expecting adjusted 2021 earnings to come in between $9.70 per share and $10.30. That suggests another good year, with adjusted earnings increasing between roughly 7% and 14%. That's a pretty wide range, which management acknowledged, but it's not outlandish given that the company describes the current environment as "dynamic."

With coronavirus cases continuing to rise in some places, and the return of economic shutdowns in various parts of the world, there is obviously still a great deal of uncertainty. But even at the low end of guidance, Stanley Black & Decker would be on track for a pretty solid year in 2021.  

Wall Street is already well aware of the stock

So, from a business standpoint, Stanley Black & Decker looks fairly well-positioned. But Wall Street is aware of this. For example, the stock price is now about 20% above where it was at the start of 2020 before the pandemic hit. Over the past year, the shares have doubled in value, rebounding strongly from the pandemic-driven bear market last year. So the question today isn't really whether or not Stanley Black & Decker is a good company, it's whether or not it is worth the valuation that's being assigned to it.

SWK Chart

SWK data by YCharts

The answer on valuation is "probably not," but looking at some numbers will help explain why. Stanley Black & Decker's price-to-sales ratio is currently around 2.15 times versus a five-year average of just 1.6 times or so. Its price-to-earnings ratio is roughly 26 times today, compared to a longer-term average of 23.5 times. The same overvaluation trend holds true for the price-to-book-value and price-to-cash-flow ratios as well. This is not a cheap stock.  

But perhaps the growth opportunity is worth the price of admission. Only the forward price-to-earnings ratio is currently 19.9 times compared to a five-year average of 17.7 times. And the price-to-earnings-to-growth ratio (more commonly referred to as the PEG ratio) is around 2.2 times compared to a longer-term average of 1.9 times. In both cases, these metrics suggest investors are paying a higher than normal price for Stanley Black & Decker's growth prospects.   

For those with a dividend focus, meanwhile, the yield is a miserly 1.4%, which is actually slightly below what you could get from an S&P 500 index fund. More importantly, it's near the lowest levels of the past 30 years for the company. Stanley Black & Decker looks very expensive today, just about any way you look at it.  

Tread carefully with Stanley Black & Decker stock

Even a great company can be a bad investment if you pay too much for the stock, which is sage advice offered up by the father of investment research Benjamin Graham (the man who helped train Warren Buffett). Today, Stanley Black & Decker looks like a well-run company that is being afforded a premium price. There are some who think that the company's growth prospects justify a premium valuation. That's fair, but anyone with even the slightest value bias will probably want to keep this name on their wish list and not on their buy list.

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Stanley Black & Decker, Inc. Stock Quote
Stanley Black & Decker, Inc.
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