It's getting to be the time of year when investors sit down to reassess their portfolios and think about which stocks could be winners in 2022. My favorite industrial stock for next year is Stanley Black & Decker (SWK -0.51%). In this article, I will outline why, and at the same time, articulate a simple example of a behavioral finance concept for readers.
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A stock to buy for 2022
Fans of behavioral finance will already be aware of the concept of recency or availability bias. Simply put, this is the tendency for investors to overweight the latest or most available piece of news or information on a company.
If you make this mistake and focus solely on Stanley Black & Decker's latest developments, you will avoid the stock. However, if you look ahead and visualize a snapshot of what the company could look like to investors in a year, then the stock looks very attractive.
One interesting point to note: This argument relies on the assumption that investors will give Stanley Black & Decker a high valuation at the end of 2022 because of the recency bias kicking in, as its fundamentals will look a lot better at the time.
How Stanley Black & Decker looks now
Without further ado, here's a brief description of what the narrative on Stanley Black & Decker looks like to investors now.
Stanley Black & Decker is a stock facing significant cost pressures that eat into margin and profitability. The company recently reduced its full-year adjusted earnings per share guidance, to $10.90 to $11.10 from $11.35 to $11.65, on the back of increased cost headwinds. Management's estimate for full-year inflation and cost headwinds went up from $75 million at the start of the fiscal year to $690 million in the third quarter.
Moreover, Stanley's management expects cost headwinds to carry over into 2022 to the tune of $600 million to $650 million. Its outlook for a fourth-quarter operating margin of 11% implies a figure significantly lower than the 14.6% achieved in 2020.
It's not hard to see why investors might not be reluctant to buy the stock, provided they are only sticking to the narrative above.
How Stanley Black & Decker could look in a year
Now let's take a look at a potential snapshot of the narrative around the stock in a year based on management's guidance and Wall Street analyst estimates.
Stanley Black & Decker is about to report a 17% increase in revenue from $17.2 billion in 2021 to $20.1 billion in 2022, driven by mid-single-digit volume growth and the game-changing integration of lawn and garden equipment company MTD. Management has successfully implemented price increases and surcharges to help offset cost increases, and operating profit margin has progressively risen through the year.
The raw material cost increases in 2021 created easier comparisons in 2022, so cost pressures abated. Meanwhile, management expects significant margin expansion at MTD and Stanley's existing and complementary lawn and garden products in the future. In addition, the large pipeline of products created out of investment by Stanley in 2021 bore fruit in 2022. Stanley completed the sale of its non-core security assets for $3.2 billion in cash in 2022 and used the proceeds to buy back $4 billion worth of stock in the year, while refocusing the business on its core hardware and tools industry.
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Stanley Black & Decker generated nearly $2 billion in free cash flow (FCF) in the year, and based on the market cap of $31.2 billion in November 2021, the stock trades at just 15.6 times FCF. Furthermore, it has a host of earnings growth opportunities from new products, growing its e-commerce sales (where it is the clear market leader), expanding lawn and garden equipment sales, growing MTD margins, and reducing costs.
Stanley Black & Decker for 2022
All told, the narrative around the stock could look a lot stronger at the end of next year, and if the events discussed above come to fruition, it's a pretty safe bet that the stock won't be trading at 15.6 times FCF at the end of 2022. Instead, I would expect the stock price to rise through 2022 as the company's improving narrative starts to build. That's why I think the stock is well placed to have a great 2022.
