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Motley Fool Issues Rare “All In” Buy Alert

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It's been a tough year for Stanley Black & Decker (SWK -2.22% ) . That said, investors don't buy stocks for what's happened in the past; they buy them for what could happen in the future. So, in this regard, the stock and its 3.7% dividend yield are worth looking at. There's a turnaround story in place, and despite some potential headwinds, the stock seems to be a good value.

The company's supply chain issues have been deeper, and raw material costs have been far higher than management expected at the start of the year. Meanwhile, the slowdown in consumer spending has significantly reduced its sales expectations. The result is management's outlook of full-year adjusted earnings per share (EPS) of $5 to $6, compared to guidance of $12 to $12.50 given in February. It's a massive reduction in earnings expectations, and the market has punished the stock by taking it down nearly 55% so far this year.

With the bad news out of the way, let's look at the investment case -- including both the positives and the negatives -- for the stock.

The strongest argument for the tools and hardware stock rests on management's restructuring plan and the stock's valuation. If management hits its objectives, the current stock price should look like a fantastic bargain in a couple of years. 

In the second-quarter earnings call, CFO Corbin Walburger said the company expects to get back to 2019 "earnings power on an annualized basis" in 2023. After analyst questioning, management said this equated to something close to $7.25 in EPS. Walburger argued that annualizing the EPS expected for the second half of 2022 and adding that to the $1 billion of expected cost savings would lead to "a little over $7 a share."

For reference, Stanley reported $3.88 in adjusted EPS in the first half of the year, so the full-year target of $5-$6 implies a range of $1.12-$2.12 for the second half. Annualizing that gets to $2.24-$4.24, and including the $1 billion worth of cost cuts (equivalent to $4 in EPS) brings the EPS to a range of $6.24-$8.24. These figures would put Stanley's price-to-earnings ratio at just 10.4 to 13.7 times earnings in 2023. Moreover, management believes there's another $1 billion in cost savings available in 2023-2025.

The plan to cut costs by $2 billion in three years (with $1 billion in 2023 alone) is critical to a successful restructuring. (The key details of the plan are in the table below.)

These changes make sense. For example, CEO Don Allan said that "half" of the supply chain transformation involves things "we would have done anyway prior to the pandemic." The pandemic led to a surge in demand for DIY tools, and management focused on meeting that demand rather than restructuring the business. Moreover, the sale of its security solutions business (to Securitas) and its automatic doors business (to Allegion) means Stanley can focus on tools, outdoor products, and industrial fasteners -- allowing a reduction in corporate expenses and manufacturing facilities. 

Reducing product range to lower the complexity of its supply chain and manufacturing operations

Reducing its number of suppliers

Optimize organizational layers & spans $100 million

Reducing layers of management from 12 to 7-8 initially

"30% reduction in facilities across our footprint over the next three years" *

Lean productivity across its manufacturing footprint

$1.5 billion (of which $0.5 billion by 2023)

Data source: Stanley Black & Decker presentations. *CEO Don Allan at a recent conference.

The case for buying Stanley stock and enjoying its 3.7% dividend yield is compelling. However, it's not without risk. There's no guarantee the cost-cutting plan will work. Furthermore, there are signs of weakening in the housing market, and that's not good news for sales of DIY tools. Also, Stanley may have issues with pricing while trying to reduce inventory in a weak consumer spending environment. It's not going to be an easy fix, and there's risk along the way, but the stock looks like a decent option for value-oriented investors.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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