Stanley Black & Decker, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Stanley Black & Decker is a global provider of power tools, hand tools, outdoor equipment, and engineered fastening systems, with a diverse portfolio of brands and a complex global supply chain.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Stanley Black & Decker, Inc. (SWK) is a global manufacturer and provider of hand tools, power tools, outdoor equipment, and engineered fastening systems. Operating through two primary segments, Tools & Outdoor and Industrial, the company serves a broad range of customers, including professionals, consumers, and industrial clients.

  • Tools & Outdoor Segment: This segment provides power tools and equipment, hand tools, accessories, and storage products. This includes well-known brands like DEWALT, STANLEY, BLACK+DECKER, Craftsman, and Irwin. The products range from corded and cordless power tools to hand tools, landscaping equipment, and storage solutions for both professional and consumer markets.
  • Industrial Segment: The Industrial segment manufactures and sells engineered fastening and fastening systems, primarily for use in assembly operations. These systems, often high-precision and technologically advanced, are sold to customers in industries such as automotive, aerospace, and electronics.

Revenue Distribution: SWK’s revenue is primarily generated from North America with a sizeable percentage coming from Europe. While emerging markets have less revenue, the company is trying to grow these markets. Revenue is driven mainly by power tool sales and hardware in particular, making a significant part of revenue contingent on building and DIY trends. The company has also invested in engineered fastening systems, which should increase industrial profits.

Industry Trends and Competitive Landscape: The industries in which Stanley Black & Decker competes are influenced by several factors:

  • Growth in DIY: The DIY trend and home improvement sales are important for the Tools and Outdoor business, especially in North America and Europe.
  • Innovation: New technology in power tools and other products is a constant source of competition and helps companies grow.
  • Construction Activity: Construction activity drives the demand for both industrial tools and fastening solutions as well as professional tools and equipment, which means that they are exposed to volatile economic conditions.
  • Sustainability: As consumers become more concerned about the environment, manufacturers are feeling pressured to design more sustainable and longer-lasting products.
  • Global Competition: The competitive landscape is diverse, ranging from small specialized players to large global manufacturers. Companies with large-scale advantages can benefit, but some companies benefit from being more specific in their product and technology.

What Makes the Company Different: A critical aspect of what makes SWK different is their diverse portfolio of brands and offerings. They are constantly introducing new technologies and innovations, which keeps them competitive. Also, SWK focuses on improving operational efficiency and distribution, and they are trying to expand their presence in high-growth emerging markets. However, this diversification also implies high complexity and risk.

Financials in Detail

Recent Financial Performance: The latest quarterly report ending September 30th shows a lot of mixed results. While the sales were better than they have been historically, they are still not trending upward. The earnings per share were well below expectations, with major impact from lower margins and higher interest expense. Because of all of this, it looks as though they might miss their earnings target for the year.

  • The company is dealing with declining sales and a large amount of excess inventory, which management has promised to reduce. They are also going to sell off some underperforming businesses in hopes to increase liquidity and reduce expenses.

  • The company reported a decrease in operating income, driven by lower revenue and margins. This indicates they might be facing short-term headwinds, and not all of their markets are performing well.

  • They have a high debt burden and are paying a lot in interest expense, which is reducing profits.

Income Statement: A closer look at the financial statements reveals some details:

  • Revenues: They were $4.56 billion for the third quarter in 2022, down 0.5% from the prior year. Organic revenue declined 2% primarily due to lower volumes, but that was slightly offset by a 1.6% increase from pricing. The revenue from the Tools & Outdoor division was more resilient, while the Industrial unit experienced large declines. The European market continues to experience weak demand. The decrease was driven primarily by lower volume, despite an increase in pricing.
  • Gross margin was 28% in the third quarter of 2022 compared to 30.6% in the third quarter of 2021, this shows that the company is having a much harder time controlling costs.
  • Operating Margin came in at a disappointing 10% in the last quarter of 2022, compared to 13.4% in 2021. This was primarily due to a variety of operating expenses and higher sales expenses.
  • Net income has fallen dramatically, from $170.9 million in 2021 to $164.5 million in 2022, indicating weaker profitability.
  • EPS has also fallen, from $1.05 diluted EPS to $0.94 diluted EPS, indicating that the company is not as profitable as it was last year.
  • Cash flows: Cash flow was extremely low, which indicates some short-term problems with the company.

Balance Sheet: A few key points about the balance sheet:

  • Total Assets: Current assets are at $16.8 billion as of Sept 30th, while long term assets are at $10 billion, for a total of $26.8 billion.
  • Total Liabilities: Liabilities totaled $22.1 billion on September 30th, indicating a lot of debt that the company has undertaken.
  • Equity has been declining recently, which indicates that profitability is not high enough to counter their liabilities. Equity has gone down by 16 percent since 2021.
  • Debt: The company has a significant debt load, which implies high interest expense and the risk of difficulties with payments. The high amount of long-term debt and leases also creates risk.

Moat Rating

Given all the evidence provided above, the economic moat for Stanley Black & Decker is at a 2 out of 5.

  • Justification:
  • Weak Brand Power: SWK has a diverse portfolio of brands, but most of those are only in the low to middle range and are easily substituted by competitors. The brand names have high recognition, but not necessarily a high value in terms of pricing power. * Limited Switching Costs: Customers, both DIYers and professionals, can easily switch to other brands of tools, making switching costs very low. These products are not specialized and are readily available everywhere.
  • Moderate Cost Advantages: They have gained scale in manufacturing to reduce costs, but they also have relatively high transportation expenses, which diminishes the overall cost advantage.
  • Weak Network Effects: Their engineered fastening business does not have any network effects.
  • Overall, SWK lacks the enduring competitive advantages that drive long-term profitability.

Risks to the Moat and Business Resilience

  • Technology Disruption: Technological advancements could make their existing products obsolete, and they may have trouble adapting.
  • Commodity Prices: Increases in raw material prices, especially steel, could increase costs and reduce margins.
  • Competitive Environment: The intensely competitive nature of the industry will require the company to reduce costs while investing in better technology, which might be difficult.
  • Economic Cyclicality: As construction and manufacturing are cyclical, it leaves SWK exposed to economic recessions.
  • High Debt: Their large debt burden makes them more vulnerable to economic downturns. It also greatly increases the interest expense, reducing profit.
  • Inventory Management: A failure to manage inventory, which has been a recent problem, can erode profitability.
  • Execution Risk: The restructuring and turnaround process presents a lot of execution risk, and there is no assurance it will work correctly.
  • Emerging Markets Risk: SWK is investing in emerging markets for further growth, but this has its own risk with the volatile nature of these markets.

Understandability Rating

The understandability of the business is a 2 out of 5.

  • Justification:
  • The business model is not entirely straightforward, due to the variety of products, business lines, and diverse customer base. It is difficult for an investor to fully grasp the complex supply chain, and many of its different parts.
  • The industry is well known and understood, but analyzing all the different financial statements of the company, including goodwill and acquisitions, can be difficult for the lay person.
  • Understanding the intricacies of the industry and its long-term trends requires a significant amount of specialized knowledge.

Balance Sheet Health

The balance sheet health rating for SWK is a 3 out of 5.

  • Justification:
    • While they have a lot of assets, their debt is concerningly high, and they might be forced to sell assets at unfavorable prices if liquidity is an issue.
    • Their cash holdings are currently low, but this should improve with the restructuring and sale of assets.
    • The decrease in shareholder equity is a significant cause for concern and indicates that they are not as profitable as they were.
    • They are still in a reasonable position, but require significant improvement to bring their debt down and achieve better profitability.
  • While there are some short-term liquidity issues, their assets are still greater than their liabilities.

Recent Concerns and Problems

As is evident from the previous report, SWK is experiencing significant difficulties, especially in the short-term, including a major slowdown in sales, reduced margins, and a lot of debt. They are also experiencing some problems in various parts of the world. In response to these difficulties, management has started a restructuring and cost-cutting plan, which they hope will bring profits back up. Also, the company has lowered guidance for the year, indicating uncertainty in future performance. They are planning on selling off some poorly performing business to reduce debt, and improve cash holdings. Management has stressed on their conference calls that they are committed to turning the company back around through a variety of means. While they are optimistic, the risks remain very high.