Why Stanley Black & Decker's Report May Be More Important Than You Think

Stanley Black & Decker, Inc. SWK is set to report earnings tonight after the bell, and the company's earnings report and guidance may give us more insight in to the housing sector. The housing sector has been a drag on the U.S. economy for years and most likely will continue to be, as the massive bubble we saw in the early part of the 2000's continues to burst with no end in sight. There are parts of the country that are better off then others, like Las Vegas (shocking, I know), Houston and Washington D.C., but as a whole, the country is still in shambles when it comes to housing, despite the various efforts of the Bush administration and the Obama administrations to try to correct this. Stanley Black & Decker is expected to report earnings per share of $1.26 and $2.62 billion in revenues. Wall Street is looking for guidance of $1.43 per share on $2.56 billion in revenues. The company is in the process of expanding its home security business, and received U.S. antitrust clearance of its purchase of Niscayah this morning. Having said that, the company still generates a large portion of its revenues from selling the company's name brand tools, Black & Decker, and DeWalt. The company had a very weird quarter last time out, beating earnings estimates, but margins compressed and the stock is down sharply since the report. If, and it is a big if, Stanley Black & Decker is able to be positive about the U.S. market, then perhaps it may be time to get a little more bullish on U.S. housing than prior to the report. This morning, the NAHB Housing Market Index was released, and it came in at 15, better than the 13 estimate that analysts were expecting. This is still a horribly depressed level, and has been in this range for months, but it does offer a little sliver of hope. Shares are off roughly 2% going into the earnings report tonight, and the company is able to show that the margin compression was just a one-time deal, then shareholders may be rewarded if everything else looks strong. Latin American growth is particularly important for this company as well, so investors will be perusing through the press release to see what CEO John Lundgren and his team have to say about this. Shares are not particularly expensive at these levels, trading at just over 11 times 2012 earnings, and sport a 2.4% dividend yield. Investors will be looking forward to see whether the merger between Stanley and Black & Decker has been able to recognize anymore cost synergies than previously reported, which would help the company's free cash flow picture. Higher free cash flows would allow the company to potentially buy back more stock or raise its dividend. A good report from Stanley Black & Decker is not going to cure the U.S. housing market overnight, nor will it cure America's economy. It could be a sign that perhaps things are looking up for the U.S. market, especially if guidance comes in better than expected. Drills, drill heads, and power tools are all needed to build a house. Stanley Black & Decker has some of the best tools on the market, especially with its DeWalt professional line. Stanley Black & Decker can not fix the housing market alone, but it could patch sentiment up just a little bit. ACTION ITEMS:

Bullish:
Traders who believe that the housing sector is starting to turn might want to consider the following trades:

• Going long Stanley Black & Decker on a strong earnings report could be profitable, especially considering how cheap it is at these levels.

• Traders may also want to consider names like Home Depot HD if tool sales are particularly strong.

Bearish:
Traders who believe that the U.S. housing sector is likely to remain in the doldrums for some time to come may consider alternate positions:

• Shorting the SPDR S&P Homebuilders ETF XHB could be profitable as the housing sector looks like it may many more years to fully recover.

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