Following Black & Decker's
Despite higher steel costs, Stanley Works ratcheted up improvements in both gross margin and operating margin in part by containing costs and exploiting certain production efficiencies. Looking ahead, the company sees continued higher steel prices in the first quarter and expects to be able to pass on roughly two-thirds of those costs to the consumer through higher prices.
While the company did not specifically address this topic, one wonders whether these higher prices will stay "sticky" even when steel prices recede. In other words, if customers become accustomed to higher prices, toolmakers may be able to squeak out a little extra profit once raw material prices abate. Of course, given the highly competitive market for tools, it's just as likely that they will continue to batter each other and drop prices as soon as they can afford to in the hopes of gaining market share.
On a less promising note, Stanley Works is looking for organic sales growth of only about 4% to 6% for 2005. Though not a terrible number, it's hard to get excited about single-digit growth. That said, it's not surprising: As mentioned earlier, it was only a matter of time before competitive pressures in the tool business began to take their toll on at least one of the players.
To be sure, Stanley is not without his charms. The business produced $317 million in free cash flow for the year and pays a reasonable dividend. On a free cash flow margin basis (that is, free cash flow divided by revenue), Stanley Works actually generated a better rate than big brother Black & Decker: 10.4% to 9.7%.
Trading at a price-to-earnings ratio of just over 16 times fully diluted continuing earnings, Stanley Works is actually pricier than Black & Decker, though the enterprise value-to-free cash flow multiples are similar. Looking across the aisle, though, I can't help but be tempted by Black & Decker's shinier growth, margins, and return on equity. Although both companies are undoubtedly quality toolmakers, I think Black & Decker shares are more interesting today.
Fool contributor Stephen Simpson, a chartered financial analyst, has no financial interest in any companies mentioned.