Summary
- Stanley Black & Decker outperformed sell-side expectations in the second quarter, with healthier underlying results in tools and better overall margins.
- Strength in tools is being driven by underlying market strength, as well as past management investments in product line expansion and retail distribution. Long-term M&A opportunities remain.
- The auto market should recover as the year goes on and into 2021, but aero and oil/gas demand could be weak for multiple years.
- Stanley Black & Decker has initiated a far-reaching cost restructuring that will include meaningful adoption of automation (in partnership with Rockwell) and reshoring.
- Few industrials look cheap in absolute terms, including SWK, but this company looks more likely to generate better near-term results and beat-and-raise quarters.
There's a lot going on at Stanley Black & Decker (SWK). Meaningful improvements to the business and a strong remodel/renovation market have supported healthier trends in Tools & Storage, while the sudden, sharp decline in auto builds has made life difficult in that business, and management still doesn't seem to have made up its mind on the Security business. On top of that, the company has launched an aggressive cost reduction program, with a prominent place given to automation, and management seems keen to pursue reshoring.
When I last wrote about Stanley Black & Decker, I wasn't inclined to chase and thought there would be opportunities to buy on dips. I certainly wasn't expecting the crater that was to come with the COVID-19 panic, but the shares have done a little better overall than the average industrial since that last piece. While Stanley Black & Decker is not as cheap as I'd like, I do like the momentum in this business and the possibility of both above-average growth and margins after a period of underperformance.
More Resilient Than Expected
Stanley Black & Decker has held up better than expected through this downturn so far, helped in no small part by both a strong underlying market for tools and the efforts made to improve this business prior to COVID-19 (new product intros, expanded retail distribution, etc.). I've been even more impressed with the margin performance, particularly in the context of a couple of years of frustrating underperformance.
Revenue fell about 17% in organic terms this quarter, a little better than the 19% drop expected by the sell-side. Gross margin declined 130bp, operating income fell 27% (with margin down 200bp), and segment profits fell 24% (margin down 160bp), beating expectations by 25%.
Tools & Storage (or T&S) saw a 15% revenue decline driven entirely by volume. Sales in North America declined 10%, and power tools (down 9%) outperformed hand tools and storage (down 23%). With more people spending more time at home, there's definitely been an uptick in DIY home projects, and Stanley Black & Decker has been benefiting - particularly with one of its significant competitors, Techtronic (OTCPK:TTNDY), hamstrung by tariffs. Segment profits fell 17%, but margin was steady at 17% - less than a point off the Q2'17 level and off only 180bp from the Q2'16 all-time quarterly peak.
The news isn't as good in the Industrial business, as weakness in the auto, aerospace, and oil/gas industries is all coming at once. Revenue declined 29%, with a 35% decline in engineered fasteners (auto and aero, predominantly) and a 19% decline in infrastructure (more oil/gas). Segment profit declined 57%, with margin nearly cut in half (down 760bp to 8.8%).
The oft-maligned Security business hung in there, with revenue down 8%, helped by a strong recurring revenue component (40%-plus of sales) from monitoring. Segment profit declined 11%, with a 260bp decline in margin.
