Stanley Black & Decker (SWK -1.07%) is finding it difficult to construct a turnaround in the current market environment. With inflation still rampant and supply chains still snarled, the tool company is having problems building up any momentum and was forced to cut its full-year outlook once again.

With fears of an official recession still hanging heavy over the market and weighing down important industries like housing and construction, Wall Street feels the weakness in Stanley's stock might not be over yet. Investors, though, may want to take a closer look to see if this is actually a good time to buy its stock.

Hammer, nails, saw, and tape measure.

Image source: Getty Images.

Building back better

The third quarter was not especially kind to Stanley Black & Decker, which reported a 9% gain in revenue for the period to $4.1 billion. But that was largely the result of acquisitions the tool maker made and price hikes it instituted to offset inflation, not any real uptick in organic sales.

Yet the cuts it's made to its business -- it may fire as many as 1,000 workers -- while selling off noncore businesses to become a leaner, more focused company, allowed it to report adjusted earnings of $0.76 per share, well above Wall Street's estimates of $0.70 per share, although that was significantly below the $2.77 per share it generated last year.

President and CEO Don Allan acknowledged the challenges the current environment represents, saying, "We made tangible progress in transforming our business during the third quarter as we improved customer fill rates, deployed a new organizational structure, implemented cost controls, and actively reduced our inventories."

The job cuts have already generated $65 million in savings, and the company reduced some $290 million in inventory. It plans to continue cutting inventory and other working capital needs in the fourth quarter that should spur growth in free cash flow. Stanley Black & Decker is looking to achieve $1 billion in cost cuts by the end of next year and some $2 billion over the next three years.

Darkest before the dawn

Yet Wall Street isn't convinced things won't get darker before the light starts to shine through. Last quarter the tool maker dramatically cut its full-year earnings expectations, slashing guidance from a range of $9.50 to $10.50 per share down to $5-$6 per share. Now it has cut that outlook again, forecasting earnings of $4.15 to $4.65 per share.

While Stanley is making the right moves to align its business with current conditions, there's risk if the economy deteriorates further. It's quite possible that could happen, as the Federal Reserve just raised interest rates 75 basis points for an unprecedented fourth consecutive time, with a fifth time possible in December. As a recent CNN headline intoned, "The Fed may have to blow up the economy to get inflation under control." 

With the housing market decelerating rapidly due to the interest rate hikes and consumers still feeling the effects of higher prices at the grocery store and the gas pump, consumer spending may drop in the fourth quarter. Even though the country's gross domestic product jumped 2.6% in the third quarter, consumer spending only rose 1.4%, down sequentially from 2% in the prior period. 

Buying near the bottom

But this is why Stanley Black & Decker may be a good, long-term pick for investors. The factors currently impacting its operations are historically a temporary hurdle to surmount, and it has been through these business and economic cycles before. Because its products are essential for both tradespeople and homeowners, there will always be demand for them, and the stock is value priced. 

Stanley shares are down 60% from recent highs, trade at just 14 times trailing earnings and next year's estimates, and go for just a fraction of its sales. Yet Wall Street expects earnings to nearly double over the next five years when Stanley will produce a forecasted $1.3 billion in free cash flow. That's the money left over after it pays its bills -- its operating expenses and capital expenditures -- to invest back into the company, buy back stock, or pay a dividend, which for Stanley currently yields 4.1% annually.

Few companies have paid a dividend for as long as Stanley has (146 years and counting), and it's increased the payout every year since 1967, making it a Dividend King -- companies that have raised their dividends for 50 consecutive years or more. With a payout ratio of just 35%, the dividend is quite safe and has plenty of room for future increases.

It would be a smart investor who decides to buy this stock now and get paid to wait out the economy's gyrations and for Stanley Black & Decker's turnaround plan to take effect.