Summary
Stronger than expected revenue, driven by double-digit growth in the Tools business, should give SWK investors some added confidence, but margin weakness is an issue.
Additional product and retail channel expansion should drive better results from Craftsman, and management is still looking to use M&A to build the Fastening business, while Security is "on notice."
Stanley Black & Decker shares look 10% to 20% undervalued, but margin pressures remain a risk and the company's track record with respect to ROIC generation is not good.
Between worries about retail demand, construction spending, auto build rates, and input costs (including tariffs), Stanley Black & Decker (SWK) still hasn’t been getting all that much love. This is part and parcel of the challenges of “buying the dip” as I outlined in my prior piece, though Stanley has only modestly underperformed industrials in general over the past three months (though Snap-on (SNA) has been much stronger), the year-to-date performance is still pretty weak and there are valid reasons to worry that management’s guidance for the second half is too aggressive.
I do see some near-term risks, but I think the valuation is pretty interesting. I do believe the Craftsman acquisition creates some interesting opportunities, and I likewise think Stanley has the option to deploy capital into potentially value-enhancing transactions within fastening. Against that “interesting” valuation, though, is the reality that this company’s track record with respect to ROIC and margin improvement are not great and there are execution risks to consider.
