Stanley Black & Decker's (SWK 0.96%) fourth-quarter earnings and full-year 2022 outlook are a bit complicated. However, when all the dust settles on the analysis, I think the stock is highly attractive. So here's the lowdown on one of the most compelling stocks in the industrial sector.
Accepting management's guidance for 2022 makes the stock look like a great value. A few highlights:
- Full-year 2022 organic revenue growth of 7% to 8%
- Adjusted earnings per share (EPS) of $12 to $12.50 in 2022, implying a forward price-to-earnings multiple of 13.4 times earnings
- Full-year free cash flow (FCF) of $2 billion, implying a forward price-to-FCF multiple of 13.4 times FCF
In addition to the attractive-looking valuations, the company has many growth drivers for 2022 and beyond. For example, management expects its operating profit margin to grow in the future as it implements price increases in tools and storage, and the company can build on its leadership position in e-commerce (its e-commerce sales rose 30% in 2021).
Moreover, management plans for multi-year margin expansion from its MTD (lawn and garden equipment) and Excel (turf care equipment) acquisitions. In addition, Stanley can build sales of its existing powerful brands like Craftsman, DeWalt, Stanley, and Black & Decker with innovative new products, such as cordless power tool batteries.
Meanwhile, the company has a margin expansion opportunity from a potential easing of supply chain pressures and raw material prices through 2022 and beyond.
Based on management's guidance, the stock looks worth buying, but the question is what level of confidence investors can have in the guidance for 2022, and what investors can expect going forward.
I have three considerations.
Volume guidance looks conservative
First, the key to Stanley's guidance in 2022 is its ability to raise prices in its core tools and storage segment. The segment was responsible for $1.99 billion in segment profit in 2021, with the industrial segment responsible for just $257 million. Management's plan for 2022 involves raising overall prices by 6% to 7%, to more than offset cost increases. But on the earnings call, CFO Don Allan said that "we're probably looking at a relatively flat volume performance" regarding tools and storage.
In other words, management expects to generate revenue almost entirely through price increases. Naturally, analysts asked whether this entails a willingness to trade some volume for price increases. CEO Jim Loree's response, "Let me put it this way, we're not necessarily prepared to trade market share for price," implies that Stanley would watch the market closely.
The key question around Stanley's guidance is whether the price increases will lead to any volume erosion. Of course, that question comes down partly to how competitors behave. It's something to keep an eye on in 2022, but considering that Stanley is not alone in suffering cost inflation, it seems unlikely that its rivals won't be forced to raise prices too. In addition, management's assumption of flat volume is probably prudent.
Second, it's easy to lose sight of the importance of Stanley's acquisitions of MTD and Excel. However, that would be a mistake because they are game-changers. For example, management expects them to contribute over $3 billion in revenue in 2022 with high-single-digit profit margins. Allan said he expected a low double-digit margin in one or two years and "mid-teens in the medium term."
Some back-of-envelope math suggests Stanley could increase operating profit by $150 million in one or two years simply through margin expansion at the acquisitions and $225 million over the medium term. Throw in sales expansion -- likely as Stanley integrates MTD and Excel into its sales channels and brand portfolio -- and that figure is even higher. For reference, Stanley generated $1.95 billion in operating profit in 2021 on sales of $15.6 billion.
The industrial segment is also growing
Third, although the industrial segment is relatively small, its exposure to the automotive and aerospace markets -- both are set to recover strongly in 2022 -- means management expects high-single-digit to low double-digit revenue growth and margin expansion in 2022. As such, the segment's profit should expand significantly in 2022 and beyond.
A stock to buy?
The company trades on reasonable valuations and has genuine multi-year revenue and margin expansion opportunities ahead. As with all companies in the industrial sector, there are questions around supply chain issues and raw material costs in 2022. However, the reward justifies the risk over the stock, and Stanley remains a compelling investment opportunity for 2022.