What Does Stanley Black & Decker's Q4 Say About The Economy?

Stanley Black & Decker, Inc. SWK reported Tuesday with fourth-quarter results that have broader implications for the state of the U.S. economy, according to Raymond James.

The Analyst

Analyst Sam Darkatsh maintains a Market Perform rating on Stanley Black & Decker.

The Thesis

Black & Decker's quarterly report is notable for its EBITA miss and "significant" 300-basis point shortfall on gross margins, Darkatsh said in a Wednesday note.

The primary drivers of the margin miss were likely an unfavorable mix as Craftsman products outgrew legacy tools and aggressive power tool pricing by competitors, the analyst said. 

Looking forward to 2019, the toolmaker said it expects to earn as much as $8.65 per share — short of the $8.80 per share analysts were expecting.

While some of the company's woes are short-term in nature, there are also issues at the macro level that are hurting demand, including rising domestic pricing pressures and a slowdown in global trends, Darkatsh said. 

Black & Decker's 2019 guidance doesn't factor in potential headwinds from a possible 25-percent tariff on Chinese goods, which represents a 55-cents-per-share potential hit to EPS, the analyst said. 

CEO Jim Loree even acknowledged Tuesday there are "signs that the U.S. economy may be soon coming to the end of one of the most enduring recoveries in U.S. history," according to Raymond James. 

After Tuesday's 15-percent sell-off, Black & Decker shares are trading at around nine times forward EBITDA, which served as a valuation support level over the past five years, Darkatsh said. Despite the valuation "now starting to get more interesting," the risk-reward profile is balanced at best, he said.

Price Action

Stanley Black & Decker were trading higher by 0.92 percent at $116.83 at the time of publication Wednesday. 

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Photo courtesy of Stanley Black & Decker.