Summary
- Stanley Black & Decker spooked the Street with a lackluster fourth quarter and 2019 guidance that seems to leave the door open for further cuts as the year progresses.
- The auto and residential construction sectors are showing more noticeable weakness, hurting SWK's near-term growth and leverage potential, and likely previewing trouble for other industrials.
- After a sharp post-earnings sell-off, SWK shares look undervalued, but there could be one more reset to guidance before the shares really recover.
Seen by many investors and analysts as a relatively safer play in industrials for 2019, Stanley Black & Decker (SWK) was hammered (down 15%) after reporting earnings, as investors saw more than a few alarming items in the company’s guidance pertaining to some major industrial end-markets. Given the acknowledgement of weakening conditions in key markets like autos and residential housing, not to mention some limits on pricing amid ongoing cost pressure, I expect investors are going to be paying much closer attention to names like Illinois Tool Works (ITW), Ingersoll-Rand (IR), and 3M (MMM) in this earnings/guidance cycle.
As for Stanley Black & Decker itself, the shares do look undervalued, but the back-end loaded guidance for the year and the margin challenges make it a tough call right now, as there could be at least one more cut to guidance before this is over. I’d also note that Stanley Black & Decker hasn’t exactly been a standout either when it comes to metrics like free cash flow growth, despite ongoing cost reduction efforts.
