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Stanley Black & Decker Awaits Construction Boost

By Tim Plaehn   |   Tuesday, 18 Oct 2011 11:02 AM

Closing in on two years after a big merger, tool maker Stanley Black & Decker (SWK) is limited by the lack of economic growth in its major market sectors. Merger synergies are increasing cash flow, but the company really needs a boost from the domestic construction industry to prosper again.

Stanley Black & Decker is the result of the March 2010 merger of Stanley Works, which purchased Black & Decker. The resulting company currently generates about half of its revenues from the do-it-yourself and construction markets for power and hand tools. The balance of sales is split between security solutions and industrial sales. Each division produces net income proportional to the level of sales.

For the second quarter of 2011, Stanley Black & Decker reported sales of $2.6 billion, up 11 percent. However, of the 11 percent, 5 percent was due to positive currency exchange rates and 3 percent due to acquisitions. Net income for the quarter, excluding merger costs, was $1.46, up from $1.24 a year earlier.

The second quarter results were boosted by a 28 cents per share tax settlement benefit. In the earnings report, management reduced the full year earnings guidance by a quarter to a range of $5 to $5.25. Earnings excluding merger costs were $3.91 in 2010.

Sluggishness

In the earnings report, Donald Allan Jr., senior vice president and CFO, stated, "Our full year guidance has not been and is not now predicated on a rebound within the U.S. housing market."

Currently, it is true that sales growth is coming from emerging market countries. Unfortunately, only 20 percent of company sales comes from Asia and Latin America. The bulk of revenues are generated in North America and Europe.

The merger is expected to produce $450 million in cost savings through 2012, and increased cash flow from the merger has exceeded $1 billion. When construction spending does start to improve, Stanley Black & Decker is the dominant company in its sector. In the meantime, investors collect an attractive dividend from SWK. The current quarterly 41 cents per share is up nicely from 34 cents a year ago. The dividend has been increased for 44 consecutive years.

Recently, the analysts at JP Morgan initiated coverage on SWK with a neutral rating. Longbow Research initiated coverage a month before JP Morgan with a buy rating on the stock.

The company reports next on Oct. 17.

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Closing in on two years after a big merger, tool maker Stanley Black Decker (SWK) is limited by the lack of economic growth in its major market sectors. Merger synergies are increasing cash flow, but the company really needs a boost from the domestic construction industry...
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