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Stanley Black & Decker (SWK) reported solid third-quarter results Friday, with cash generation and improved margin performance on full display. It’s further proof that the tool maker’s turnaround, the reason we own the stock, is well underway. Revenue for the three months ended Sept. 30 fell 4% year over year to $3.95 billion, slightly below analysts’ forecasts of $3.97 billion, according to estimates compiled by LSEG, formerly Refinitiv. Adjusted earnings-per-share (EPS) came in at $1.05, up 38% versus the year-ago period and ahead of Wall Street’s prediction of a 76 cents-per-share, LSEG data showed. SWK YTD mountain Stanley Black & Decker YTD Stanley Black & Decker shares soared roughly 8% on the print, boosting their year-to-year gains to more than 11%. That 2023 performance is way better than the S & P 500 Industrials Sector ‘s year-to-date decline of 1%. Bottom line It wasn’t an across-the-board beat — but, overall, this is the quarter we’ve been looking for. It’s why we took a stake in the company in the first place — optimization and simplification that translates into cash generation and operating leverage. We saw strength on the line items that carry the most weight, and that’s why Wall Street has greeted the results so enthusiastically on Friday. Stanley Black & Decker’s marginally weaker-than-expected sales in the quarter were more than offset by further improvement to inventory levels. That, in turn, contributed to strong cash flow performance — key to supporting the stock’s nice annual dividend yield of around 4%— and significant margin expansion at both the gross income and operating income levels. Management also raised their full-year earnings guidance on strong execution of the turnaround plan, which was implemented after the hangover from the Covid-era housing boom and supply-chain challenges hurt its financials. The company is targeting further gross margin expansion in 2024 as the work to get over the 35% by 2025 threshold continues. We’re reiterating our buy-equivalent 1 rating and $110-per-share price target, a premium of 30% from Friday’s highs of more than $84. Quarterly commentary While revenue missed the mark, operating income due to significant margin expansion indicates that management’s efforts to right the ship are paying off in a big way. Stanley Black & Decker’s gross margin expanded by four percentage points on a quarter-over-quarter basis to 27.6% and nearly three percentage points versus the year-ago period as the above earnings table shows. As the saying goes, it’s not about how much you make, it’s about how much you can keep. Q3 revenue was down 4% year-over-year on lower outdoor and do-it-yourself (DIY) customer volumes that were only partially offset by demand for Pro Tools and automotive and aerospace fasteners. Some of that is out of management’s control — after all, how many times is a DIYer going to buy a drill? However, the operating leverage improvements are the focus as the payoff of these efforts will continue into the future. In addition to ensuring that Stanley Black & Decker is better positioned to weather any near-term economic downturn, it also means that as demand picks back up, the Craftsman and DeWalt parent will be stronger and more profitable than ever before. “The benefits from our inventory optimization and supply chain transformation are now clearly being reflected in our performance,” CEO Donald Allan on the call. “As we navigate uncertain market conditions, we are continuing to focus on what is in our control to improve our margins.” Management’s global cost-reduction program — which focuses on supply-chain optimization and company simplification — drove $215 million in pretax run-rate savings in the quarter, putting the firm on track for $2 billion in annualized savings by the end of 2025. Inventory was down $300 million sequentially, bringing the total year-to-date reduction to $880 million, and $1.7 billion since the middle of 2022. These efforts were also a boost to free cash flow performance, which can be found in the Companywide part of the earnings table. Cash flow in Q3 came in well ahead of expectations at $364 million, which was a whopping 167% year-over-year increase. Management said on the conference call that “looking to 2024 and beyond, we expect the additional multiyear inventory reduction opportunity to be at or above $1 billion.” They added, “We expect to pursue further inventory reduction at the pace of $400 million to $500 million per year.” Guidance Management bumped up their earnings target for the full year, now forecasting adjusted earnings to be in the range of $1.10 to $1.40 per share. That’s up from the prior forecast of $0.70 to $1.30 per share, which at the midpoint is a 25-cent-per-share increase. Additionally, this target range is above the $1.08 per share the Street was looking for. Even on the low end of the expected range, it’s a very positive update. The company’s full-year free cash flow generation target of about $600 million to $900 million was left unchanged. It’s a bit short of the $800 million the Street was looking for, at the midpoint, but nothing we find to be troubled about. In addition to the increase to 2023’s outlook, management noted that they expect to see further gross margin improvement thanks to ongoing efficiency initiatives, working toward the ultimate goal of getting back to an adjusted gross margin over the 35% level by 2025. (Jim Cramer’s Charitable Trust is long SWK. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Stanley Black & Decker drills are displayed for sale at a Home Depot store in Emeryville, California.
David Paul Morris | Bloomberg | Getty Images
Stanley Black & Decker (SWK) reported solid third-quarter results Friday, with cash generation and improved margin performance on full display. It’s further proof that the tool maker’s turnaround, the reason we own the stock, is well underway.
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