Cash + Growth = Upgrade At Stanley Black & Decker

• The share price of Stanley Black & Decker, Inc. SWK has risen close to 4 percent year-to-date.
• Macquarie’s Mike Wood has upgraded the rating on Stanley Black & Decker from Neutral to Outperform, while raising the price target from $116 to $120.
• The upgrade is based on the company’s high free cash flow yield and its internally driven organic growth.

“We have high confidence the combination of two of Stanley’s top priorities (working capital control and focus on organic growth) will drive FCF to approach $1.2bn by FY17,” Wood stated, while mentioning that the stock warrants a premium to its industrial peers due to its above average organic growth and high free cash conversion.

Wood expects the company to continue to see robust organic growth, given that the high degree of innovation, especially in the Dewalt products, as well as recent market share gains, which are likely to continue.

Stanley Black & Decker has been outperforming the Global Tools and Storage segment, with growth in North America in the mid-teens, along with market growth, as well as growth in Europe and the emerging markets.

“We feel more confident these gains are sustainable because a majority of the outgrowth is driven by wallet gain largely through innovation with a lesser portion from more shelf space, in our view,” according to the Macquarie report.

Wood expects the IAR integration with CDIY to drive market share gains in the near term, while breakthrough battery R&D is likely to drive breakthrough innovation in the longer term.

Stanley Black & Decker expects to be able to reduce its SG&A by 1-3 percent over the next three years, while Woods believes that the company is “further along identifying cost savings than the market appreciates.”

In addition, the company is likely to stay away from publicly traded companies and deals that offer limited due diligence, following the Niscayah fiasco. Instead, it is likely to focus on its infrastructural assets and on industrial tools to diversity its heavy exposure to construction.

The EPS estimates for FY16 and FY17 have been marginally lowered, based on expectations of lower global growth.