FAST Graphs At-A-Glance

Articles which show the principles for reading and analyzing FAST Graphs At-A-Glance.

Stanley Black & Decker: Powering Its Way Toward Fair Value

FAST Graphs - Tuesday, December 10, 2013

Stanley Black & Decker (SWK) is a machine tools company built on namesakes of – you guessed it – three individuals with the last names: Stanley, Black and Decker. Frederick Stanley started a hardware manufacturing company in 1843. Duncan Black and Alonzo Decker started a similar shop in 1910, becoming known for the world’s first patent for a portable power tool. In 2010 the two companies merged to form what is today Stanley Black & Decker.

With this long history comes a wide assortment of brands, products and solutions. The construction and do-it-yourself segment – which generates roughly 50% of revenues – makes the typical hand-held tools like hammers, tape measures and flashlights along with the more exciting power tool brands of DeWalt, Porter-Cable and Black & Decker. The industrial segment – making up roughly a quarter or sales – is probably best known for its brand MAC tools, but it also operates in the fastening system and infrastructure solution segments as well. Finally, it might surprise some that the remaining 25% of Stanley Black & Decker’s business is derived from security – ranging from locks and hinges on your front door to automatic doors in a bank, airport or storefront.

Assuredly Stanley Black & Decker covers an array of tools – but interestingly even if you want a new or improved product, you can submit an idea to the company’s website

Beyond the history and product collection, potential investors might also be interested in how the company has been rewarding shareholders. To this point, Stanley Black & Decker has a storied track record of dispensing dividend payouts – having not only paid but also increased its dividend for 46 consecutive years (ranking it 25th on the increase streak list). Over the last decade these increases have come in at a rate of just over 6%. Further, the company has a substantial portion of its authorized 20 million share repurchase program at its disposal.  It seems being the leader in tools and storage has its benefits.

Yet that’s not to suggest that Stanley Black & Decker is without risks. For instance, in a recent presentation management lowered their expected earnings guidance. This was likely due to many concerns such as stalling margins in the security segment, lower than expected demand in emerging markets and general economic spending worries. It’s always prudent to take the positive aspects in step with the potential apprehensions. Let’s now move on to the past operating results of the company.

14 Years of Growth

Stanley Black & Decker has grown earnings (orange line) at a compound rate of 6.8% since 2000, resulting in a $14+ billion dollar market cap. In addition, Stanley Black & Decker’s earnings have risen from $2.22 per share in 2000, to today’s forecasted earnings per share of approximately $4.95 for 2013. (Note that this expected earnings number can be found using the company’s website and demonstrates a F.A.S.T. Graphs’ subscriber’s ability to modify expectations.) Further, as noted, Stanley Black & Decker has not only paid but also increased its dividend (pink line) for 46 straight years.

For a look at how the market has historically valued Stanley Black & Decker, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.

Here we see that Stanley Black & Decker’s market price previously began to deviate from its justified earnings growth; starting to become undervalued during the most recent recession and coming back to fair value as of late. Today, Stanley Black & Decker appears in-value in relation to both its historical earnings and relative valuation.

In tandem with the earnings growth, Stanley Black & Decker’s shareholders have enjoyed a compound annual return of 10.3% which is slightly above the 7.5% growth rate in earnings per share. This is a result of the P/E expanding from around 12.6 to today’s mark closer to 16. A hypothetical $10,000 investment in Stanley Black & Decker on 12/31/1999 would have grown to a total value of $39,084.43, without reinvesting dividends. Said differently, Stanley Black & Decker’s shareholders have enjoyed total returns that were roughly 2.5 times the value that would have been achieved by investing in the S&P 500 over the same time period. It’s also interesting to note that an investor would have received approximately 3.1 times the amount of dividend income as the index as well. 

But of course – as the saying goes – past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.

In the opening paragraphs a variety of catalysts and risks were described. It follows that the probabilities of these outcomes should be the guide for one’s investment focus.  Yet it is still useful to determine whether or not your predictions seem reasonable. 

Sixteen leading analysts reporting to Standard & Poor’s Capital IQ come to a consensus 5-year annual estimated return growth rate for Stanley Black & Decker of 12.7%. In addition, Stanley Black & Decker is currently trading at a P/E of 16.4, which is inside the “value corridor” (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Stanley Black & Decker’s valuation would be $131.64 at the end of 2018, which would be a 12.7% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.

Now, it’s paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs’ subscriber is also able to change these estimates to fit their own thesis or scenario analysis.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in Stanley Black & Decker to an equal investment in a 10-year treasury bond, illustrates that Stanley Black & Decker’s expected earnings would be 4 times that of the 10-year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.

Finally, it’s important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that – in the long-run – the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: “in what should I invest?” and “at what time?” In viewing the past history and future prospects of Stanley Black & Decker we have learned that it appears to be a strong company with reasonable upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.

Disclosure:  No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.


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    Testimonials


    “I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


    “When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

    (Wish I could be) Long FAST Graphs!!!”


    “One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


    “I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


    “Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


    “Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


    “About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


    "Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


    “If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


    “I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


    "Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


    "Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


    “Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


    “I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


    “I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


    “I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


    “Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


    “Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


    “Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


    ”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


    “Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


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