Stanley Black & Decker (SWK -1.59%) is an industrial company that owns a collection of iconic tool brands. It built that portfolio up via a series of acquisitions that have left it with a heavier-than-normal debt load. As the economy weakened in 2022, so did the company's financial results. It's only going to get worse in 2023. But here's why I have no plans to sell my shares right now.
Every story is different
No two companies are alike, which is part of the reason why investing is so interesting and so difficult. As briefly highlighted above, Stanley Black & Decker is facing a series of challenges right now that will take time to fix. Some were self-imposed (using debt to fund acquisitions), while others were simply a part of the company's business (industrial businesses are inherently cyclical).
Image source: Getty Images.
Right now, Stanley Black & Decker's story looks pretty bleak. In 2022, adjusted earnings fell to $4.62 per share from a record $10.48 in 2021. The adjusted earnings figure could fall to zero in 2023, with the top-end guidance currently sitting at $2 per share. So even the best-case scenario for the company is still worse than what was achieved in 2022.
But the negatives here are different from, say, 3M, which is dealing with legal and regulatory headwinds. Those problems are a real wild card over which 3M has little control. Stanley Black & Decker has a lot more it can control.
Taking the necessary steps
The differences are important, which is why I'm considering selling 3M (to capture my losses) and I have no plans to sell Stanley Black & Decker. Notably, Stanley Black & Decker has a plan and is executing on it.
One of the keys to the tool maker's turnaround effort is cost cutting. The goal of this three-year plan is to eliminate as much as $2 billion in costs. Management has already begun to move down this path, cutting $200 million in costs during the second half of 2022. It expects to cut $500 million by the end of 2023. In other words, it is making progress toward its goal.
A notable piece of the overall cost-saving puzzle is adjusting the company's supply chain. That includes eliminating products, for example by producing tape measures under a smaller set of brands instead of under all of its brands. The company actually sped up this process, despite the fact that it would mean a bigger hit to earnings in the near term, because it would lead to quicker long-term benefits. I'm a fan of ripping the band-aid off, so this isn't a problem for me.
Stanley Black & Decker is also going to be shutting factories so it can run a smaller number of manufacturing facilities at a higher level. That improves profitability. It recently announced plant closures, so it is clearly working toward this end as well. Meanwhile, it is working to find other efficiencies in the plants it intends to keep open.
SWK Debt to Equity Ratio data by YCharts
And in the third quarter of 2022, Stanley Black & Decker sold non-core assets, using the proceeds to trim its debt load by $3.3 billion. Once again, the company is making good on its word. The debt-to-equity ratio has fallen from around 1.2 times to roughly 0.75 times. While historically high for Stanley Black & Decker, that's not actually too troubling a figure in the grand scheme of things. It should continue to trend lower, but the balance sheet isn't the same headwind it was just a short while ago.
I'm still all in
When I step back and look at the Stanley Black & Decker story, I see a company that is working successfully toward achieving the realistic goals it set out. This is what I want to see a company I own doing, especially since I knew there was work to be done when I bought the stock. At this point, I see no reason to sell, even though 2023 will be a difficult year on the earnings front.
