What happened
Shares in tools, storage, and industrial products company Stanley Black & Decker (SWK -2.07%) fell 14.1% in March, according to data provided by S&P Global Market Intelligence. The move comes down to the likelihood that the company's earnings guidance will come under pressure in 2022.
The pessimism is due to the increase in raw material costs, such as steel, because of the onset of war in Ukraine. Unfortunately, Stanley Black & Decker has a recent history of suffering margin compression due to cost pressures, so when raw material and supply chain costs rise, investors naturally fear the worst.
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The rise in costs is even more disappointing for two reasons. First, this was supposed to be the year when the company's cost pressures eased, leading to multiyear revenue and margin expansion in the coming years. Second, unlike, say, mining or oil services companies, Stanley's sales are not likely to receive an uplift from higher commodity prices. As such, it's hard to see how volume growth can offset raw material and supply chain cost increases in the current environment.
As noted earlier, a rise in costs tends to lead to significant margin pressure at the company.
Data by YCharts
So what
The cost headwinds are significant, so don't be surprised if management lowers its full-year guidance on the next earnings call. For reference, management is currently guiding toward full-year adjusted earnings per share of $12 to $12.50 and free cash flow of $2 billion.
Nevertheless, the stock continues to look like an excellent long-term value, and investors should keep an eye on events.
Management has already indicated it would raise prices to offset cost increases and may decide to accelerate these actions in response. Moreover, its competitors are likely to do a similar thing. Meanwhile, management is busy integrating MTD, a significant manufacturer of lawn and garden products, and plans to increase its margin over the coming years. The company's industrial segment could suffer as automotive production estimates have been lowered, but its aerospace-based sales should help offset any sales shortfall.
Now what
Investors need to keep a close eye on the company's next earnings report, due at the end of April. It's unlikely to be a standout report, and under the circumstances merely maintaining full-year guidance would be seen as a major plus. Nevertheless, the decline in the share price is creating an attractive entry point into a stock that can soar provided it finally shakes off cost pressures.
