Streetwise for Friday, July 28, 2017
Are you confused about what is happening on Wall Street? If you are one, reason could be the continual bombardment of so called, “investment news”. Consider the following description of the Street’s daily activity. No, I did not make any of this up.
“The current formation shows how the bulls were able to absorb what the bears threw at them. In the ensuing counterattack, the bulls not only recaptured the ground they had lost the previous day they went a step further into the bear’s camp. The ambush has left the bears in disarray, leaving them exposed to further bull rushes.” Is this Monday night football or the stock market?
The simple solution is not to try and correlate the market, specifically the S&P 500 index, to a specific investment or investment decision. Stock price variations are often based on a combination of human emotion and biased or inaccurate information. Instead, you want to dig into a company’s most recent quarterly financials and there is no better time than earnings season.
Consider for example the recent announcement by Stanley, Black & Decker (SWK) a company I have never written about before. SWK is a leading global manufacturer of branded tools and engineered solutions for professional, industrial and consumer applications with a $22.5 billion market capitalization.
When Stanley Works acquired Black & Decker in 2009, it projected cost synergies of $350 million. Yet, the company’s streamlining of supply chain operations was so efficient that it ended up saving $500 million. The acquisition, in fact, has become an important case study on successful integrations. More recently, SWK completed two major acquisitions, Newell Brands and Craftsman.
The company has managed to sustain a premium price for its tools due to both the quality of its products and its deliberate strategy of emphasizing the message: “Made in America.”
At the same time, the company’s exposure to various headwinds including uncertain global economic conditions, unfavorable foreign currency movements, commodity inflation, industry rivalry and high debt levels is cause for some concern.
Nonetheless, SWK has reported better-than-expected results in each of the last four quarters, with an average positive earnings surprise of 5.38 percent. So how did it so this reporting period?
Revenue increased 10 percent primarily because of acquisitions. Earnings per share (EPS) forecasts were raised using Generally Accepted Accounting Principles (GAAP), as opposed to “adjusted numbers.” At the same time, the company continues to work at integrating its latest acquisitions and its working capital is being strained in the process.
Nonetheless, a seven percent organic growth and eight percent growth from acquisitions helped to produce the strong sales number.
It was essentially a flat quarter for operating income although net income was slightly higher due to a lower tax rate. Earnings per share were flat due to an increase in share count because of vested options from 2013.
In terms of cash flow, the company produced a weaker quarter. SWK had a large decrease in operating cash flow due to negative working capital charges. The one thing that did change was a large increase in accounts receivable. This was most likely due to the acquired assets, especially those from Sears, that probably required adjustments, which hurt working capital.
The situation will likely improve going forward as SWK can undertake a better use of the acquired Sears assets than Sears itself. In addition, SWK will likely receive better terms from suppliers.
The company raised its full year GAAP EPS outlook to between $8.05 and $8.25 per share. This represents growth of 10-13 percent in EPS year over year.
The intrinsic value of the shares using the ValuePro.net conservative free cash flow to the firm model produces an intrinsic value of $285.15 per share. My earnings estimate for this fiscal year is $7.25 per share with a 12-month projected share price of $154, yielding a 10 percent capital gain, plus there is an indicated dividend of 1.75 percent.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
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