Shares of Stanley Black & Decker (SWK 0.99%) are down roughly 50% from their 2021 highs. There are very good reasons for this, as you'll learn below. But the company is expecting an incredible improvement in earnings in 2024. Assuming it can live up to this forecast, the stock could be in for a big rebound, too. Here's what you need to know.
Stanley Black & Decker dropped the ball
During the coronavirus pandemic, demand for the tools that Stanley Black & Decker produces was quite strong. It makes sense: People stuck at home took on home improvement projects to enhance their living experience. Adjusted earnings in 2021 rose 30% versus 2020 and hit a record of $10.48 per share. As 2022 got underway, the company was projecting adjusted annual earnings to come in between $12.00 and $12.50 per share, which would have been yet another record result.
Image source: Getty Images.
That didn't exactly play out as expected. Instead, Stanley Black & Decker posted adjusted earnings of $4.62 per share. That was more than a 50% decline. It isn't hard to understand why investors might have found that upsetting after the company set much higher expectations. Things have only gotten worse in 2023, with management now expecting full-year adjusted earnings to be in the range of $1.10 to $1.40 per share. That would be another huge decline and helps explain the stock price malaise.
The backstory for this weak performance is equally as troubling. High leverage, slowing sales, and weak margins were all contributing factors. But Stanley Black & Decker has been working to get back on track by reducing leverage, cutting costs, and raising prices, among other things. The improvements are already starting to show up in the company's earnings.
Stanley Black & Decker is getting better quarter by quarter
Stanley Black & Decker is an industrial giant and you can't turn a ship like this around on a dime. It takes time, but slow and steady progress has been on clear display. For example, the company's adjusted gross margin has climbed each quarter since hitting a low point in Q4 2022. The improvement is huge, too, with adjusted gross margin rising from roughly 20% to 28%.
Meanwhile, the Dividend King (it has increased its dividend for 56 consecutive years) entered 2023 expecting adjusted earnings to be between zero and $2.00 per share. That's been narrowed to $1.10 to $1.40 per share, which tells you that the worst-case scenario didn't even come close to transpiring. Sure, the top end got lowered, but the real risk for investors was that the bottom fell out of the business, and that just didn't happen.
Meanwhile, looking out to 2024, Stanley Black & Decker has reiterated its earlier guidance for adjusted earnings of between $4.00 and $5.00 per share. That was a target used to justify the company's turnaround plans, so it would be reasonable to expect that management was being aggressive. But the business is well into that turnaround plan and it is still supporting the range, which is a very good sign.
2024 could be a great year for Stanley Black & Decker
So 2023 looks like it will be the nadir for earnings, which is worth noting. But the real takeaway is probably the improvement that will come about in 2024, if management can hit the targeted adjusted earnings range. Assuming the company can earn $1.40 per share in 2023, the high end of the projected range, adjusted earnings will increase by 285% in 2024 if it only hits the low end of expectations ($4.00). The high end -- $5.00 -- would lead to a 350% jump in adjusted earnings. Wall Street will likely change its view of Stanley Black & Decker in a very positive way if either of those scenarios plays out.
