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,” or what I would be more prone to call “unadulterated gobbledygook.”
Consider one of my favorite descriptions of a so-called analysis of some of the daily activity on Wall Street. 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?
Do not try and correlate an investment’s worth with news commentary. Short-term volatility of stock prices is often the result of human emotion combined with questionable information. Instead, you want to dig into a company’s most recent quarterly numbers and there is no better time than earnings season.
Stanley Black & Decker (SWK) is a good example. The company is a leading global manufacturer of branded tools and engineered solutions with a $21.22 billion market capitalization.
SWK has managed to sustain a premium price for its tools due to both their quality and the company’s deliberate strategy of emphasizing the message: “Made in America.”
Yes, SWK’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.
When I last wrote about the company a year ago, my earnings estimate for the company’s 2017 fiscal year was $7.25 per share with a 12-month projected share price of $154, yielding a 10 percent capital gain, plus an indicated dividend of 1.75 percent.
So how did the company do? Earnings for the year were $7.45 per share and the shares recently closed at $140.40. That is, in my opinion, an unrealistically low price that is in no small part attributable to the political climate.
So where do we go from here? The company just issued its second quarter numbers, posting earnings of $2.57 per share, exceeding Street consensus of $2.03 per share, an earnings surprise of 26.60 percent. This quarter’s result compares favorably to earnings of $2.01 per share for the same period a year ago. The figures are adjusted for non-recurring items.
Over the last four quarters, SWK has surpassed consensus earnings numbers estimates each quarter. Remember the cockroach theory as applied to earnings surprises, i.e., you rarely see only one.
SWK posted revenues of $3.64 billion for the quarter ended June 2018, which compares favorably to year-ago revenues of $3.23 billion. Again, the company exceeded consensus revenue estimates four times over the last four quarters.
The company’s shares have lost about 17 percent since the beginning of the year. And while they have certainly underperformed the market so far this year, the question is what we should expect going forward. Unfortunately, there is no easy answer.
One reliable measure that could help is to consider the company’s earnings outlook. Not only does this include current consensus earnings expectations for the coming quarter(s), but also how these expectations have changed.
Empirical research shows a strong correlation between stock prices and the trend in earnings expectations or consensus. The current consensus estimate is for earnings of $2.47 per share on $3.59 billion in revenues for the third quarter and earnings of $8.41 per share on $13.99 billion in revenues for fiscal 2018, versus last year’s earnings of $7.45 per share.
The intrinsic value of the shares using a conservative free cash flow to the firm model produces an intrinsic value of $288 per share. My earnings estimate for this fiscal year is $8.35 per share with a 12-month projected share price of $170, yielding a 23 percent capital gain, plus there is an indicated dividend of 1.86 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.RuddInternational.com.