Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Stanley Black & Decker Inc (SWK, Financial). The stock, which is currently priced at 80.9, recorded a gain of 2.51% in a day and a 3-month decrease of 11.73%. The stock's fair valuation is $193.35, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Stanley Black & Decker: A Potential Value Trap?
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Stanley Black & Decker should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.72. These indicators suggest that Stanley Black & Decker, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Stanley Black & Decker
Stanley Black & Decker is a leading manufacturer of hand and power tools. The company operates in two reportable segments, namely Tools and Outdoor and Industrial. The Tools and Outdoor segment is comprised of the Power Tools Group (PTG), Hand Tools, Accessories and Storage (HTAS), and Outdoor Power Equipment (Outdoor) businesses. Geographically, it derives a majority of its revenue from the United States.
Stanley Black & Decker's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Stanley Black & Decker's Altman Z-score reveals Stanley Black & Decker's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Stanley Black & Decker's historical data, 2021: 0.35; 2022: 0.30; 2023: 0.36, we observe a recent decline following an initial increase in this ratio. This downward movement indicates Stanley Black & Decker's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Stanley Black & Decker's EBIT to Total Assets ratio from historical data (2021: 0.09; 2022: 0.03; 2023: 0.00) indicates a descending trend. This reduction suggests that Stanley Black & Decker might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Conclusion
Despite its seemingly undervalued price, Stanley Black & Decker's low Altman Z-Score and declining financial ratios suggest that the company might be a potential value trap. Investors should therefore exercise caution and conduct thorough due diligence before making an investment decision.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.