"This too shall pass" is an ancient saying that supports an investment in Stanley Black & Decker (SWK 2.13%) today. The problem for investors right now is that the time it takes the company to work through what has become a very deep business downturn may end up being measured in years, not months. When the company reports earnings on February 2, the news will likely be mostly bad.
How bad is it?
As an industrial stock, Stanley Black & Decker's business is inherently cyclical, with financial results rising and falling along with economic activity. Only a large portion of the company's power tool sales run through hardware stores, which sell to both the professional set and general consumers. Consumers tend to react more quickly and deeply with regard to spending cuts than business/professional customers. That leaves Stanley Black & Decker with material "short cycle" exposure, meaning its business tends to falter quickly when the economy sours.
Image source: Getty Images.
This dynamic was on very clear display in 2022. Entering the year management was looking for adjusted earnings to fall between $12 and $12.50 per share. That guidance got trimmed in each of the first three quarters, declining to just $4.15 to $4.65 per share by the third quarter. Given that backdrop it's easy to see why the stock has dropped by around 50% since the start of 2022.
But the cyclical nature of the business isn't the only problem the company has been facing. It has also been dealing with supply chain problems and inflation. Meanwhile, a recent acquisition has left the company's balance sheet more leveraged than normal, something that perhaps rightly worries investors. So there is a lot of bad news here.
Fixing it, slowly
Stanley Black & Decker isn't ignorant to the problems. It has been working on cutting costs, but the plan will play out over a number of years, not months or quarters. It has also been selling non-core assets and using the proceeds to trim leverage, but debt reduction from here will probably slow down. While supply chain problems have already started to ease, the company still has a backlog of its own products that need to work through its system. And then there's the fear of a recession in 2023, which could prolong many of the company's problems.
There are a lot of moving parts, but the company's full-year 2022 results are definitely going to be terrible compared to where Stanley Black & Decker expected them to be at the start of 2022. And while there's reason to anticipate some improvement in 2023 as the company provides full-year guidance, it is unlikely to be a dramatic return to pre-2022 performance levels. The headwinds it faces and the solutions available are just not quick-impact issues.
So, investors that own or are looking at Stanley Black & Decker should go into February with the expectation that there's some downside risk to the stock price. And yet, given the historically high dividend yield of 3.7%, it could still be an attractive stock. The stock looks historically cheap and the troubles will likely pass, eventually. Assuming they do, income-focused investors will have found that, in hindsight, this stock decline represented a strong entry point.
No rush?
Given the backdrop that exists today, it would be understandable if investors chose to sit on the sidelines here. If things could actually get worse before they get better, why jump aboard? From a long-term perspective, it is often better to be roughly right when you buy than to attempt perfection and miss the chance entirely. Yes, Stanley Black & Decker could see continued headwinds and its stock could be in for a rough ride. But "this too shall pass" and the stock will likely start to move higher before that becomes fully apparent in the company's financial performance. Despite what should be more bad news in February, Stanley Black & Decker looks fairly attractive if your investment horizon is measured in decades.
