The market's decline is creating buying opportunities, and even though all three of these companies face near-term risk, they all look priced to generate strong long-term returns for investors. Here's why Stanley Black & Decker (SWK -0.52%), Johnson Controls (JCI -0.86%), and Autoliv (ALV -0.04%) are stocks worth buying today.
Stanley Black & Decker
This year hasn't panned out the way investors in the hardware and tools company expected it would. It was supposed to be the year when raw material and supply chain cost pressures eased, leading to margin expansion throughout the year. Meanwhile, the agreement to sell the electronic security business to Securitas for $3.2 billion, and sell its automatic doors business, Access Technologies, to Allegion for $900 million, was intended to refocus the company.
Stanley's growth objectives now focus on its core tools and industrial businesses and integrating MTD, the outdoor lawn and garden products business fully acquired in 2021.
Unfortunately, the economy had other ideas, and Stanley's management was forced to slash its full-year guidance on its first-quarter earnings call on the back of rising commodity and transportation costs. Did they get worse in the second quarter, and is Stanley's full-year guidance again under threat? Probably. However, commodity and freight costs have come down significantly recently.
Moreover, the stock will look like an excellent value if the company can get anywhere near its full-year guidance. For reference, the current guidance is for adjusted earnings per share (EPS) of $9.50 to $10.50 and free cash flow (FCF) of $1 billion to $1.5 billion. The low points of the guidance would put Stanley on 11.6 times earnings and 16 times FCF. That's too cheap for a company restructuring itself for growth in its core markets. So be aware that Stanley may well cut guidance on its upcoming second-quarter earnings call, but it will have to be a pretty big cut to make the stock not look like a good value.
Johnson Controls
This heating, ventilation, air conditioning, refrigeration (HVACR), fire and security products, HVACR controls, and services company is another one that's disappointed investors in 2022. Unfortunately, management's guidance proved overly optimistic, particularly regarding the issue of overcoming supply chain difficulties and component shortages (notably semiconductors).
As a result, full-year earnings per share (EPS) guidance was cut from $3.22 to $3.32 to a new range of $2.95 to $3.05 on the second-quarter earnings call in early May. But here's the thing. Management maintained expectations for organic revenue growth of 8% to 10%, and its trailing three-month orders were up 11%, while backlog grew 12% to a record $10.9 billion.
Moreover, management believes that when the supply chain issues get resolved, there's a margin expansion opportunity as the company starts to execute on its higher-margin products (which use semiconductors) in its backlog.
While Johnson Controls may well face some pressure in its third-quarter earnings, as building owners may decide to tighten spending plans as fears of a slowdown occur, the company still has a margin expansion opportunity in its fiscal 2023 and is trading on about 16 times currently estimated 2022 earnings. This stock looks like a good value.
Autoliv
It's no secret that the supply chain disruptions, COVID-19-related lockdowns, and component shortages have caused auto manufacturers to scale back production plans in 2022. That's terrible news for the industry and for leading airbag, seatbelt, and steering wheel company Autoliv. Having started the year expecting global light vehicle production (LVP) to grow 9%, leading to full-year organic sales growth of 20% for Autoliv, management was forced to lower its growth expectations to 12% to 17% on the downgrade to LVP growth expectations to 0% to 5%.
Meanwhile, the pressures coming from increased raw material and transportation costs caused management to lower its full-year operating margin expectation to 5.5% to 7% from 9% previously. Full-year operating cash flow guidance is now $750 million to $850 million, down from $950 million.
It's not going to be an excellent year for Autoliv. However, as with Stanley and Johnson Controls, there's evidence that Autoliv's costs are coming down. For example, steel and freight costs have declined significantly recently. In addition, the pent-up demand for vehicles will undoubtedly lead to increased production when the supply chain issues resolve. Everything points to a much better 2023 for Autoliv, and with Wall Street expecting FCF of $530 million in 2023 and the stock trading with a market cap of just $6.6 billion, the stock looks like an excellent value.
