Buying a stock for the long-term means having a lot of faith in the company's market position, management, and end-market prospects. On all three counts, I think building products company Johnson Controls (JCI 0.55%) and tool maker Stanley Black & Decker (SWK -0.83%) are strong candidates to consider adding to your portfolio.
Moreover, these two stocks have declined in price in 2022, which only makes them look to me like even better bargains.
Johnson Controls, an ESG stock to buy
This company manufactures building products in the heating, ventilation, and air conditioning, fire and safety, and building controls niches. However, the real excitement is around its OpenBlue software platform and digital capability.
OpenBlue will help drive the company's growth in three ways. First, building owners are increasingly adopting smart building technology because they can see the cost benefits they derive from it. Simply put, smart buildings generate masses of real-time data that can be analyzed to find actionable insights that owners can use to improve building performance and reduce their expenses.
Second, Johnson Controls is on a drive to improve its equipment attachment rates. In other words, management wants to attach more long-term service contracts to its new equipment sales and to the installed base of equipment it has already sold to customers. The value that OpenBlue adds will help it do that, and given that services revenue tends to come with higher profit margins, that's a margin expansion opportunity, too.
Third, there's a huge growth opportunity for the company in helping building owners meet their net-zero carbon emission targets. Buildings are responsible for 40% of global carbon emissions, and digital technology can help owners significantly reduce their properties' carbon footprints. In addition, the pandemic has caused building owners to focus much more attention on ensuring healthy indoor air quality and clean environments in their facilities. Management believes meeting those needs will add up to a $250 billion market opportunity over the next decade.
Management is forecasting annualized revenue growth in the 6% to 7% range over the next few years. That, combined with planned cost-cutting measures and the expectation of margin expansion driven by rising services revenue, has the company predicting earnings growth at an 18% to 21% annual rate over that time frame. With the company valued today at less than 20 times Wall Street's free cash flow estimates, I think Johnson Controls is one of the best growth stocks available on the market.
Stanley Black & Decker's hidden growth prospects
Most people know about this company's market-leading tools business, whether through popular brands such as Black & Decker, Craftsman, and Stanley, or through its more professional-caliber brands like DeWalt and Bostitch. The portion of its business that comes from selling those tools through an array of retail outlets would be attractive enough alone, but that's not all there is to Stanley Black & Decker.
For example, Stanley is an e-commerce leader in the tools industry. Its online revenue continues to grow at a double-digit percentage pace annually, and currently represents around 20% of its total tool revenue. Moreover, Stanley's industrial business (fasteners and engineered products) contributes about 11% of segment profit and is weighted toward the automotive and aerospace sectors.
Both sectors should recover strongly in 2022 as aircraft production and light vehicle production rebound.
Finally, Stanley has a significant opportunity to grow earnings by increasing profit margins at MTD and Excel, two lawn and garden product makers it recently acquired. Management expects $3 billion in revenue from those two businesses in 2022. By my calculations (which are based on management's comments), Stanley could increase annual operating profit by $150 million over the next couple of years, and by $225 million over the medium term, simply by boosting margins at the acquired businesses.
Putting it all together, Wall Street analysts foresee Stanley growing its operating profit by 21% in 2022 and generating $2 billion in free cash flow. Based on the current market cap, that would mean Stanley is trading at 13.4 times its 2022 free cash flow. That's too cheap for a company with such solid growth prospects, and I think the stock could soar in 2022.