We recently downgraded our rating for Stanley Black & Decker (SWK), manufacturer of tools and engineered security solutions, from Outperform to a Neutral recommendation. Factors including integration risks, rising competition and financial burden were the prime reasons for the downgrade.
Second Quarter Highlights
Stanley Black & Decker reported its EPS of $1.03 in the second quarter of 2010, compared with $0.55 in the year ago quarter, representing a year-over-year growth of 87.3%. Results also surpassed the Zacks Consensus Estimate of 77 cents with the increase, primarily attributable to higher revenue and contribution from the acquired Black & Decker.
Considering the top line, net revenues in the second quarter were $2.4 billion, representing an increase of 157.4% from $919.2 million in the comparable quarter of 2009. The increase reflects the accrual of revenues earned by Black & Decker and its unit volumes gained from supply chain restocking and improving demand.
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 – $3.30. Through the BDK merger, the company estimates annual cost synergies of $350 million by 2013, out of which $90 million is expected to be realized in 2010.
Management believes that the merger will support the continued expansion of its global business platform. Thus, the company revised its 2010 outlook and expects EPS to fall within the range of $3.35-$3.55 versus its prior expectation of $3.10 – $3.30.
Net organic revenue growth is expected to be 4%-5% from 2009 and gross margin to be approximately 37%-38% for the second half of 2010. Free cash flow in 2010 is expected to exceed $600 million, versus management’s prior forecast of roughly $600 million.
Cost synergies of $350.0 million over three years of acquisition are expected from the Black & Decker acquisition. It is anticipated that roughly $90 million would be realized in 2010. Besides, from the ADT France acquisition, synergistic benefits are also expected in 2011.
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 the company 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. Moreover, from the ADT France acquisition, Stanley is likely to reap synergistic benefits in 2011.
However, realization of synergies from the company’s acquisitions is highly dependent 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 successful 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 financial condition, liquidity and access to capital markets in case of degradation in investment grade rating level.
Also, active competition in all of its businesses and tremendous dependence on housing industry and exposure to risks associated with sourcing and manufacturing overseas could materially impact sales, earnings and cash flow in future. Thus, we downgrade Stanley Black & Decker’s recommendation from Outperform to Neutral, which is in line with the Zacks Rank of # 3 (Hold).
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