On August 1, 2023, Stanley Black & Decker Inc (SWK, Financial) recorded a 3.6% gain, with an Earnings Per Share (EPS) of 4.46. However, the question arises: Is this stock a potential value trap? This article aims to provide an in-depth valuation analysis of Stanley Black & Decker (SWK), a leading manufacturer of hand and power tools. We encourage readers to delve into the following analysis for a comprehensive understanding of the company's value.
Company Introduction
Stanley Black & Decker operates in two main segments: Tools and Outdoor, and Industrial. The majority of its revenue comes from the United States, specifically from its Tools and Outdoor segment. This segment encompasses the Power Tools Group (PTG), Hand Tools, Accessories and Storage (HTAS), and Outdoor Power Equipment (Outdoor) businesses.
As of the date, the company's stock price stands at $102.85, while its GF Value, an estimation of fair value, is $205.49. This comparison sets the stage for a deeper exploration of the company's value.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line, as displayed on our summary page, represents the ideal fair trading value of a stock. The factors contributing to its calculation are:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
When the stock price significantly exceeds the GF Value Line, the stock may be overvalued, indicating potentially poor future returns. Conversely, if the stock price is significantly below the GF Value Line, it suggests undervaluation and potential for higher future returns.
According to GuruFocus' valuation method, Stanley Black & Decker appears to be a possible value trap. The current stock price of $102.85 per share suggests that investors should think twice before investing.
Link: These companies may deliver higher future returns at reduced risk.
Assessing Stanley Black & Decker's Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Key indicators like the cash-to-debt ratio and interest coverage offer insights into its financial health. Stanley Black & Decker's cash-to-debt ratio stands at 0.05, ranking it lower than 95.81% of companies in the Industrial Products industry. Overall, Stanley Black & Decker's financial strength is rated 4 out of 10, indicating poor financial health.
Profitability and Growth
Investing in profitable companies, particularly those demonstrating consistent profitability over the long term, poses less risk. A company with high profit margins is generally a safer investment than one with low profit margins. Stanley Black & Decker has been profitable for 10 out of the past 10 years. In the past twelve months, the company generated a revenue of $16.4 billion and Earnings Per Share (EPS) of $4.46. Its operating margin is 1.84%, ranking it lower than 74.11% of companies in the Industrial Products industry. Overall, GuruFocus ranks Stanley Black & Decker's profitability at 7 out of 10, indicating fair profitability.
One of the most crucial factors in a company's valuation is its growth . Companies that grow faster create more value for shareholders, especially if that growth is profitable. Stanley Black & Decker's average annual revenue growth is 9.4%, ranking it better than 60.08% of companies in the Industrial Products industry. However, its 3-year average EBITDA growth is -21.2%, which ranks worse than 89.47% of companies in the Industrial Products industry.
Another method to evaluate a company's profitability is comparing its return on invested capital (ROIC) to its weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Stanley Black & Decker's ROIC was 0.77, while its WACC came in at 8.78.
Why Stanley Black & Decker Might Be a Value Trap
Stanley Black & Decker's potential value trap status is primarily due to its Piotroski F-score of only 3 out of a possible 9. This low score may indicate a downward trend in crucial aspects such as profitability, funding, and efficiency. Investors should therefore look beyond the attractive low valuation and ensure there are no hidden long-term risks. For a better understanding of the Piotroski F-score and its role in measuring a company's business trend, please click here.
Conclusion
Overall, Stanley Black & Decker (SWK, Financial) appears to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks lower than 89.47% of companies in the Industrial Products industry. To learn more about Stanley Black & Decker stock, you can check out its 30-Year Financials here.
To discover high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
