Stanley Black & Decker Upgraded to Outperform - Analyst Blog

We recently upgraded our recommendation for Stanley Black & Decker (SWK) from Neutral to Outperform.

Second Quarter Highlights

Earnings per share (EPS) from continuing operations for the manufacturer of tools and engineered security solutions were $1.24 in the second quarter of 2010, up 39.3% compared with 89 cents in the comparable quarter of 2009. EPS surpassed the Zacks Consensus Estimate of 77 cents.
 
Net income from continuing operations soared 191.1% year over year to $206.1 million, compared with $70.8 million. The increase in net income was primarily due to growth in revenues that more than offset higher expenses.

Consolidated results of the company included a full quarter's results of Black & Decker Corporation, which was acquired in the first quarter of 2010.

Net revenues in the second quarter 2010 increased 157.4% year over year to $2,365.6 million, compared with $919.2 million in the second quarter of 2009. Growth in net revenue was mainly due to the addition of revenues earned by Black & Decker, higher unit volumes owing to supply chain restocking and improving demand, and revenue contribution from other acquisitions, offset partially by a negative currency translation impact.
 
Outlook

Management believes that the merger will support the continued expansion of its global business platform. It has therefore revised its 2010 outlook and expects EPS to fall within the range of $3.35-$3.55 versus its prior expectation of $3.10 - $3.30.

The revised guidance is based on management’s net organic growth assumption of 4%-5% from 2009 and gross margin expectation of 37%-38% for the second half of 2010. Also, a slower pace of customer restocking and higher commodity inflation will influence results in the second half of 2010.

Free cash flow in 2010 is expected to exceed management’s prior forecast of roughly $600 million.

From its Black & Decker acquisition, the company anticipates annual cost synergies of $350.0 million over three years of acquisition, with roughly $90 million to be realized in 2010. Also, from the ADT France acquisition, synergistic benefits are anticipated in 2011.

Upgraded to Outperform

We believe Stanley Black & Decker has embarked on a growth strategy of shifting its business portfolio toward favored growth markets through acquisitions and divestitures. Recently, in March 2010, the company closed the acquisition of ADT France and thereby secured the leading market share in France and expanded its security footprint in Europe. Moreover, the same month, Black & Decker Corporation (BDK) was acquired, which the company hopes will support the continued expansion of the company’s global business platform.

Moreover, management appears to be quite optimistic about the expansion prospects of its five strategic growth platforms: Convergent Security, Mechanical Security, Engineered Fastening, Infrastructure and Healthcare. The company targets infrastructure platform to grow roughly $1-$2 billion in over 5 to 7 years, focusing primarily on specialized tools, equipment and services for commissioning, repair and maintenance of infrastructure in areas such as oil and gas, transportation, water and sewer, and power systems.

The recently acquired CRC-Evans complements the company’s intention to grow its Infrastructure platform by gaining exposure in the oil and gas infrastructure industry.

The company has outperformed the Zacks Consensus Estimate by an average of 31.28% in the last 4 quarters. Earnings per share (EPS) estimates for 2010 and 2011 now stand at $3.57 and $4.61, respectively, representing year-over-year growth of 28% and 29%. These factors, along with management’s optimistic tone and upwardly revised earnings guidance, have convinced us to upgrade our recommendation from Neutral to Outperform, as supported by its Zacks #1 ('Strong Buy') Rank.