Leading household tools manufacturer Stanley Black & Decker (SWK) has generated record growth across all segments as the desire for comfortable living spaces continues to drive increased spending on home improvement projects. In fact, with young homeowners turning to renovation rather than buying new homes, the company is expected to continue seeing a surge in demand for its home improvement goods and services. So, we think SWK’s reasonable valuation, despite the company’s solid organic growth prospects, makes it a solid bet now. Let’s discuss.
Founded in 1843, Stanley Black & Decker, Inc., New Britain, Conn.-based (SWK) is involved in tools and storage, industrial, and electronic security systems worldwide. A vibrant home improvement market with an increased focus by consumers on renovating living spaces and gardens amid the homebound lifestyle forced by the pandemic lockdown mandates enabled SWK to generate 31% organic growth in its last reported quarter.
Strong construction-related demand across all major markets and increased demand for both outdoor and indoor product electrification projects have helped SWK’s stock gain 51.1% over the past year and 14.7% year-to-date. The company has raised its 2021 adjusted EPS outlook to $10.70 – $11.00 from a range of $9.70-$10.30. Also, it expects its organic revenue growth to be in the range of 11-13%.
Amid a strong demand for home remodeling and increased discretionary spending on home improvement projects, we think SWK is well positioned to benefit and achieve record growth this year and beyond.
Here is what we think could shape SWK’s performance in the near term:
As homeowners continue to pursue discretionary and deferred home remodeling projects this year, demand for home renovation products and other tools and supplies for outdoor maintenance is on the rise. In fact, a substantial fall in unemployment, with a significant reopening of the economy, should lead to increased disposable income. This should further encourage consumer spending on house repair projects. The home improvement market surpassed $762.9 billion in 2020 and is expected to achieve a 4.3%-plus CAGR from 2021 – 2027.
Furthermore, because surging new-home prices are driving more millennials to spend more on remodeling, SWK is well positioned to capitalize on the trend.
Bullish Analyst Sentiment
A $2.85 consensus EPS for the current quarter, ending June 2021, indicates a 78.1% improvement year-over-year. Furthermore, SWK’s EPS is expected to rise 23% in the current year, 9.4% next year, and at the rate of 13.2% over the next five years.
Analysts expect SWK’s revenue to rise 4.9% year-over-year to $4.04 billion in the next quarter, ending September 2021. Its revenue is expected to come in at $16.6 billion in 2021, up 14.2% from the same period last year.
SWK’s net sales increased 34% year-over-year to $4.2 billion in the first quarter ended March 31, 2021. Its tools & storage net sales grew 48%, while industrial net sales expanded 11% from the prior-year quarter. The company’s gross margin rose 440 basis points year-over-year to 37.3%. Also, SWK’s net income increased 258.9% year-over-year to $447.91 million, while EPS grew 238.6% from its year-ago value to $2.98.
SWK’s 18.41x forward P/E ratio is 13.4% lower than the 21.27x industry average. And in terms of forward EV/EBIT, the company is currently trading at 15.04x, which is 16.7% higher than the 18.05x industry average. The stock’s respective 2.69 and 6.2 forward Price/Book and PEG ratios compare favorably with 3.20 and 1.75 industry averages.
POWR Ratings Reflect Promising Outlook
SWK has an overall A rating, which translates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
The POWR Ratings also evaluate stocks by various components, such as Growth, Value, and Quality. SWK has an A grade for Sentiment and Growth, which is consistent with analysts’ expectation that its revenue and earnings will grow.
Also, in terms of Value Grade, SWK has a B. The stock’s lower-than-industry P/E ratio is in sync with this grade.
Click here to see the additional POWR Ratings for SWK (Quality, Stability, and Momentum).
The stock is ranked #6 of 65 stocks in the A-rated Home Improvement & Goods industry.
If you’re looking for other top-rated stocks in the same industry, with an Overall POWR Rating of A or B, you can access them here.
SWK’s robust portfolio of innovative products and increased commercial and capacity investments position it uniquely to capitalize on the home improvement boom. The remodeling market’s improving demand outlook should help the company deliver above-average organic growth in the near term. Furthermore, the company’s strong margin expansion and relative undervaluation should help it stand out in its industry. So, we think the stock is a good bet now.
SWK shares were unchanged in premarket trading Monday. Year-to-date, SWK has gained 15.52%, versus a 14.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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