Stanley Black & Decker’s financial performance
Annual revenues of Stanley Black & Decker (SWK) increased from $7.4 billion in 2010 to $11.1 billion in 2015 at a compounded annual growth rate (or CAGR) of 8.5%. Topline growth was led by an upturn in construction (XHB) and automotive (FSAVX) activity towards the end of 2015. The diluted earnings per share for the same period surged from $1.34 to $5.79 at a CAGR of 34%. The relatively higher CAGR for diluted earnings per share was primarily due to higher profits after the integration of Black & Decker and lower restructuring charges.
Free cash flows are an important indicator of liquidity and the ability of a company to fund future growth and distribute dividends to shareholders. Stanley Black & Decker’s free cash flows have progressively increased from $557 million in 2010 to $871 million in 2015 at a CAGR of 9.4%.
Since return on equity figures (or ROE) can be easily distorted by leverage taking, a DuPont analysis allows us to dissect its driving factors. The method examines operating efficiency, asset utilization, and the leverage factor using the following formula: ROE = net profit margin * asset turnover * financial leverage.
As seen in the illustration, Stanley Black & Decker’s return on common equity has increased from 9.6% in 2011 to 14.4% in 2015, majorly driven by a higher return on assets. This is still far away from the figures in 2005. However, the tool industry has undergone substantial structural changes due to competition from cheap Chinese manufacturing. Most toolmakers such as Bosch (BWSQY), Makita (MKTAY), Snap-on (SNA), and Hitachi (HTHIY) have set up shop in China, creating downward pressure on margins. It is, therefore, highly unlikely that the company will attain similar levels of operating efficiency in the near future.
Stanley Black & Decker (SWK) anticipates diluted earnings per share to range from $6.0–$6.2 in 2016 led by organic growth of 3% ($0.45–$0.50), productivity growth, and cost reductions of $0.45–$0.50. Organic growth across segments is expected to range in low single digits and margins are likely to be flat year-over-year. As seen in the illustration, the strengthening of the dollar across currency baskets is likely to result in headwinds of $170 million–$190 million or $0.85–$0.90 in diluted earnings.