Despite being an elite Dividend King, Stanley Black & Decker (SWK 0.99%) is not a stock for the faint of heart today. In fact, share prices have fallen nearly 60% from their 2021 high-water mark. Unfortunately, it's been for good reason. But management is upbeat about the future, and if its expectations prove out, the company's earnings are set for a huge rebound in 2024.
The terrible, horrible, no-good year
Toolmaker Stanley Black & Decker's problems didn't show up overnight. They were built over years, as the company went on a debt-fueled acquisition spree. That was compounded by the fact that the company operates in the cyclical industrial sector. And since many of the company's products are also sold to consumers, the business can be even more volatile than other cyclical industrial stocks. Ultimately, when things went south here, they went south in a big way.
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Some numbers might help illustrate what happened. In 2021, Stanley Black & Decker posted record adjusted earnings of $10.48 per share, up 30% from 2020 levels. A key factor in that was the coronavirus pandemic, which resulted in people staying home. Stuck at home, people started to spend money to upgrade their homes, boosting tool sales. And then the world opened back up again. In 2022 the company's adjusted earnings fell to $4.62 per share.
SWK Gross Profit (Quarterly) data by YCharts
Management quickly circled the wagons to come up with a plan. Stanley Black & Decker was very clear that its intent to cut costs, improve efficiencies, and sell off assets to speed up its effort to reduce leverage would be painful upfront. But it was confident that the long-term benefit would be worth it. It looks like 2023 could be the hardest year, with adjusted earnings set to fall to between $0.70 per share and $1.30.
Good news comes out of the second quarter
But things are likely to get much better next year. For starters, adjusted gross margin has improved sequentially for two consecutive quarters. That's a sign that the company's efforts are starting to show results. Also, management is decidedly more positive today than it was just a couple of quarters ago.
The evidence of this is in the low end of the adjusted earnings guidance range, which was raised from zero up to $0.70 per share. Although the top end of the range fell from $2.00 per share down to $1.30, the bottom end is the bigger news. Basically, the worst-case scenario that management thought could happen doesn't appear to have happened. And still the big story is going to be 2024.
When Stanley Black & Decker started its turnaround effort, the company suggested that it would get back to adjusted earnings of between $4.00 and $5.00 per share in a couple of years. It was pressed on that longer-term guidance during the most recent earnings call and didn't back down from its projections. There were some caveats, of course, since Stanley Black & Decker can't control economic cycles, but 2024 is likely to be a very good year, relatively speaking.
Just how good? If adjusted earnings come in at the low end of $0.70 per share in 2023 and the low end of $4 in 2024, earnings will have increased more than fivefold in just a single year. And that's the worst-case scenario based on current guidance. If earnings are at the top end in 2023 and the low end in 2024, they will still have increased more than threefold. So even if management barely meets its 2024 adjusted earnings goal, there will be a lot of good news for currently beleaguered Stanley Black & Decker investors.
One more minor thing to consider
Stanley Black & Decker is clearly in turnaround mode, so risk-averse investors may not want to buy it. But it looks like the situation is starting to improve and that 2024 could be a big year in the turnaround effort. This brings the story back to the company's Dividend King status. Increasing a dividend for 50 or more consecutive years basically requires muddling through both good times and bad. This is clearly a bad time, yet the dividend was just raised a token $0.01 per share per quarter.
That's a statement that the board thinks the company is still moving in the right direction. The company's improving financial results suggest more aggressive investors might want to take that sign to heart. It will probably be too late to act once earnings come in as projected, assuming they do, in 2024.
