Stanley Black & Decker's (SWK 1.74%) stock is down a painful 50% or so in 2022. There is a good reason for that drop, but it is opening up an opportunity for long-term investors. And, notably, there's an interesting electric vehicle (EV) angle to the story. Here's what you need to know.

Down and down some more

At the start of 2020, industrial Stanley Black & Decker was looking for adjusted earnings to come in between $12.00 and $12.50 a share. By the end of the first quarter, that was dropped to a range of $9.50 to $10.50. And after the second quarter, that range was dropped again to $5.00 to $6.00, half or less of the guidance at the start of the year. No wonder the stock has been cut in half.

People working on an auto assembly line.

Image source: Getty Images.

Cost increases from a mixture of supply chain issues and inflation, which is something that's affecting all industrial stocks, is a big part of the problem. However, for Stanley Black & Decker, there's a second negative. A material portion of the company's business is tied to consumers, so performance tends to drop more quickly than that of peers that have more business-to-business exposure.

In industry lingo, Stanley Black & Decker has a short cycle heavy business. It is working on the problems it faces, looking to cut costs and increase prices, just like its peers. However, the near-term hit to earnings was pretty much inevitable given the weakening economic backdrop. When things start to improve, earnings are likely to bounce back more quickly than for many peers.

But the current downbeat share price is exactly why long-term investors should be interested here.

A small but growing division

In addition to making tools, Stanley Black & Decker also makes high-precision industrial fasteners. While the company's tools business saw organic growth fall 9% in the second quarter, the industrial division posted organic growth of 12%, with engineered fasteners up 7%. This side of the business is fairly diversified, spanning from infrastructure to autos, so no one end market is dominant. But electric vehicles are a key growth opportunity.

To put some numbers on that, management estimates that it currently gets about $10 of content per vehicle today in combustion automobiles. But that figure for EVs is between $30 and $60. With automakers materially increasing production rates of EVs, Stanley Black & Decker potentially has a substantial growth engine hidden behind its tool business. That remains true even if EV production simply displaces combustion vehicle production because Stanley Black & Decker's dollar content is materially higher in EVs.

It's important to put some perspective on this. The tools business generated around $12.8 billion in sales in 2021, while the industrial division put up $2.5 billion. This isn't a pure play EV stock by any stretch of the imagination. However, with Stanley Black & Decker expecting vehicle electrification to increase its addressable auto market by three to six times, there is still a huge opportunity here. And when the cyclical tool business gets back on track, as it has many times in the past following industry downturns, this company could stage a huge earnings rebound.

A slightly different angle

Often investors want pure-play options when looking at hot sectors. Sometimes, however, it can pay to look a little further afield and consider something with more diversification. Right now Stanley Black & Decker is getting hammered, pardon the pun, because of its tool business, and that is hiding a big growth opportunity the company has in the electric vehicle space. If you are willing to think long-term, you can buy this stock at a big discount and get the benefit of EV growth, too.