Should You Buy Stanley Black & Decker After Earnings?

Stanley Black & Decker, Inc. (NYSE:SWK) missed earnings and revenue estimates in its third quarter report released on October 17th. While revenue was actually up 6% from the third quarter of 2011, margins shrunk and drove earnings down 26% over the same time frame. This is the same trend that the company has seen so far this year- a better top line than the same period a year earlier, but lower in terms of net income. Considering that the company had grown its revenue and still fallen short of analyst expectations in that department, it should come as no surprise that the earnings miss was big: the 69 cents that Stanley Black & Decker reported was less than half of what the sell-side had been expecting. The stock dropped about 4% on the news, though it has risen slightly up until now.

Bill Miller

Stanley Black & Decker, Inc. is best known for its hand tools, but it also sells security systems and industrial products. It currently has a market capitalization of just under $12 billion, which places it at a forward P/E multiple of 11. We’d generally consider that a potential value multiple, but with the company’s trailing P/E considerably higher than that figure it seems that analyst consensus for 2013 is assuming strong earnings growth. With Stanley Black & Decker’s recent results we’d be cautious of depending on a rebound at the company.

Stanley Black & Decker, Inc. was one of the top five holdings in Breeden Capital Management’s 13F portfolio at the end of June (see more of Breeden’s favorite stocks). The fund, which reported owning about 970,000 shares, is managed by Richard Breeden, former head of the SEC. Legg Mason Capital Management, which is managed by Bill Miller, more than tripled its own stake in the company to a total of 1.6 million shares (find more stock picks from Legg Mason Capital Management). D.E. Shaw, a large hedge fund which has made its founder David Shaw a billionaire, initiated a relatively small position of about 220,000 shares during the second quarter (research more stocks that D.E. Shaw bought).

Machine tool companies Kennametal Inc. (NYSE:KMT), MRC Global Inc (NYSE:MRC), and RBC Bearings Incorporated (NASDAQ:ROLL) as well as diversified machinery company Danaher Corporation (NYSE:DHR) make good peers for Stanley Black & Decker. Of these companies, Kennametal looks the most like a value stock on a quantitative basis at only 8 times forward earnings estimates and a five-year PEG ratio of 0.7. While the company hasn’t exactly been prospering recently, its earnings in the fourth quarter of its fiscal year (which ended in June) were even with the same period a year earlier. It seems like a better pick than Stanley Black & Decker. MRC is priced at about the same forward multiple- its P/E based on analyst consensus for 2013 is 12- but its trailing P/E of 28 is even higher than Stanley Black & Decker’s, so the sell-side appears to be even more optimistic about improvements there. Its revenue and earnings, however, have been up strongly recently so this view is a bit more credible.

RBC and Danaher trade in the 15-16x range in terms of forward P/E multiples. Danaher is also the only one of these peers to be larger than Stanley Black & Decker in terms of market cap, with an equity valuation of $37 billion. Its most recent quarter was similar to Stanley Black & Decker’s, as its revenues were up compared to the same period in 2011 but its earnings fell 8% as margins shrunk. It therefore seems to be in a bit better shape, but trading at a slight premium. RBC Bearings saw double-digit increases in both revenue and earnings in its most recent quarter (the first of its fiscal year ending in March), and is priced at only 19 times its trailing earnings (the forward P/E is 16). Growth investors might want to take a look at that company.

The recent report from Stanley Black & Decker suggests that the company will have a difficult time reversing recent trends and hitting its earnings target for next year. It does not seem to be as good a value as Kennametal and possibly a poorer pick than other peers as well.