uploads/2016/04/part-631.jpg

Stanley Security: A Story of Margin Recovery

By

Updated

Stanley Security’s margins improve due to cost control

Stanley Security is Stanley Black & Decker’s (SWK) second-largest business unit and contributed to 18.9% of the company’s sales in 1Q16. Sales in the segment grew 1% organically as strong performance in Europe more than offset fewer automatic door installations in North America. The major talking point in the segment was the recovery in operating margins to a level not seen since the first quarter of 2012. Operating margins increased 110 basis points to 11.9%, driven by improved operating leverage, productivity initiatives, and cost actions.

Article continues below advertisement

Stanley Security: Regional market performance

Within Europe, the company’s sales grew 3% organically, achieving its sixth consecutive quarter of organic growth in the region. Higher installation revenues and gains in France, the Nordic countries, and Central Europe were the primary growth drivers. Sales were flat in the convergent security solutions business. Sales growth in the United States, as well as in emerging markets, fell by 1% year-over-year.

In terms of geographical markets, Europe and North America are Stanley Security’s biggest markets. The segment derived 57% and 37% of its annual sales in 2015 from North America and Europe, respectively. Emerging markets were responsible for just 5% of its total 2015 sales. Additionally, investors should note that margins in Europe are lower than those in the United States. Therefore, improved US contributions could lead to far greater margins.

Outlook for Stanley Security

In fiscal 2016, business profits in Stanley Security are expected to rise by low single digits due to ongoing productivity improvements. Specifically, management intends to see selling, general, and administrative expenses fall below 30%. Organic growth in Europe is likely to be sustainable and is expected to rise by 3% in coming quarters as well.

Investors interested in trading in the industrial space could look into the Guggenheim S&P 500 Equal Weight Industrials ETF (RGI), and those interested in trading in dividend-based ETFs could consider the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). Major holdings in NOBL are Nucor (NUE) and Illinois Tool Works (ITW), with respective weights of 2.5% and 2.3%.

Advertisement

More From Market Realist