We recently downgraded our rating for Stanley Black & Decker (SWK), manufacturer of tools and engineered security solutions, from Outperform to Neutral, primarily due to a host of factors including integration risks, rising competition and a financial burden that could impact the company’s future earnings and cash flow.
 
First-Quarter Results Beat Estimates
 
Stanley Black & Decker reported EPS of 70 cents in the first quarter of 2010, compared with 48 cents in the year-ago quarter. Results also surpassed the Zacks Consensus Estimate of 59 cents with the increase primarily attributable to well-executed productivity projects and effective cost control measures.
 
Considering the top line, net revenues in the first quarter were $1.3 billion, representing an increase of 38% from $913 million in the first quarter of fiscal 2009. The increase reflects the addition of revenues earned by Black & Decker.
 
Outlook for 2010
 
Management believes that the merger will support the continued expansion of its global business platform. Thus, Stanley revised its 2010 outlook and expects EPS to fall within the range of $3.10 to $3.30. Through the BDK merger, the company estimates annual cost synergies of $350 million by 2013. Out of that $90 million is expected to be realized in 2010.
 
Downgraded to Neutral
 
We believe that Stanley Black & Decker embarks on a growth strategy of shifting its business portfolio toward favored growth markets through acquisitions and divestitures, which helps it in expanding its global business platform. Of the recently acquired Black & Decker, the company anticipates annual cost synergies of $350.0 million over three years of acquisition. Also, from the ADT France acquisition, synergistic benefits are anticipated in 2011.
 
However, realization of synergies from the company’s acquisitions is highly contingent on its ability to integrate them successfully within the stipulated time frame. Also, the company will spend roughly $400 million in total cost over three years to achieve synergies from its BDK acquisition. Any failure in integration will adversely impact the company’s future growth prospects.
 
Stanley Black & Decker is required to raise additional debts or issue equity to fund its acquisitions. A huge debt burden could adversely affect the company’s cost of funds, liquidity and access to capital markets in case of degradation in investment grade rating level.
 
Also, active competition in all of its businesses and huge dependence on housing industry and exposure to risks associated with sourcing and manufacturing overseas could adversely impact sales, earnings and cash flow in the future.  Thus, we downgrade Stanley Black & Decker’s recommendation from Outperform to Neutral, which is in line with the Zacks #3 Rank (Hold).
Read the full analyst report on “SWK”
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