Shares of Stanley Black & Decker (NYSE: SWK ) have had a tough go of it lately. Let's take a look at why it's falling and see if cloudy skies are still in the forecast.
How it got here
It wasn't supposed to be like this for Stanley Black & Decker shareholders.
The company, which combined Stanley Works and Black & Decker two years ago, was supposed to benefit from increased cost synergies and greater business segment diversity. What's actually happened is that merger-related costs and its security business are weighing on its growth prospects while the housing market has once again tripped up, causing many to be concerned about recent strength in the construction and do-it-yourself segments.
Still, there are a lot of reasons to be excited about Stanley Black & Decker's outlook if you're a current shareholder. Strong results from Home Depot (NYSE: HD ) continue to signify strength in the remodeling market, which is good news for the company's tools, hardware, and do-it-yourself line of products. Another boost could come from Sears Holdings (Nasdaq: SHLD ) . The company, in the midst of its turnaround campaign, will rely heavily on strong brand-name products like Stanley Black & Decker to carry its business during Father's Day and around Christmas, potentially boding well for both companies.
How it stacks up
Let's take a look at how Stanley Black & Decker stacks up next to its peers.
SWK data by YCharts.
Not surprisingly, Danaher (NYSE: DHR ) , Snap-on (NYSE: SNA ) , and Stanley Black & Decker have traded in tandem for years. Perhaps a closer look at their financial metrics will give us better differentiating clues between the companies.
| Company | Price/Book | Price/Cash Flow | Forward P/E | Dividend Yield |
|---|---|---|---|---|
| Stanley Black & Decker | 1.5 | 12.5 | 9.4 | 2.6% |
| Danaher | 1.9 | 12.5 | 13.5 | 0.2% |
| Snap-on | 2.1 | 20.5 | 10.3 | 2.3% |
Source: Morningstar; yields are projected.
Now this is a fruitful exercise because it does help to differentiate these companies a bit better.
Danaher offers a considerably more diverse line of products that serve multiple industries, so I'm not surprised to see its valuation trade more in-line with Stanley Black & Decker. However, Danaher's paltry dividend yield of 0.2% makes it an easy pass-by for income-seeking investors.
Snap-on can partially go toe-to-toe with Stanley Black & Decker on the dividend front, but it trades at a noticeable premium to book value and cash flow. It's also worth noting that according to analysts' estimates found at Yahoo! Finance, Snap-on's five-year projected growth rate is the slowest among these three companies.
Stanley Black & Decker isn't without its growth hiccups, but it has raised its dividend an impressive 44 straight years and is the cheapest overall value of the three stocks listed above.
What's next
Now for the $64,000 question: What's next for Stanley Black & Decker? The answer is going to depend on how quickly the company can begin realizing the cost synergies of its merger, and whether it can shake off the weakness in its security segments in order to capitalize on the rising trend of home remodels.
Our very own CAPS community gives the company a three-star rating (out of five), with 89% of members expecting it to outperform. Although I've yet to personally make a CAPScall on the company, I am ready to enter a limit order of outperform at $54.
"Why not buy the stock right now?" Very simply, Stanley Black & Decker is at the mercy of weakness in Europe and the U.S. housing market. Although I feel it's strong enough to survive the short-term move lower in global markets, I also feel the current pessimism in its stock price could be exacerbated further. At just $54, I would be entering an outperform call with the company at just eight times forward earnings and with a dividend yield of 3%. That's a valuation and a brand name I can wholeheartedly get behind.
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