October witnessed a decline in Stanley Black & Decker's stock, and this drop might present an attractive investment prospect.
The shares of industrial and tool manufacturing company Stanley Black & Decker (SWK) dropped by 15.6% in October, as reported by S&P Global Market Intelligence. The primary cause for this decrease can be traced back to the company's third-quarter 2024 financial report. The report indicated that the company encountered setbacks in its recovery process and would require more time than initially anticipated to restore previous levels of margins and inventory.
The appeal for Stanley Black & Decker stock
The rationale for purchasing this stock centers around the belief that the company will lower its high inventory levels by increasing sales. Concurrently, an ongoing cost-reduction plan aims to save $2 billion annually by 2025.
As a result, the manufacturer plans to raise its gross profit margin to at least 35% and substantially enhance its earnings and cash flow.
What went awry in the third quarter
Stanley's markets showed signs of weakness in the third quarter, with declines in interest-rate sectors such as the consumer DIY tools industry and the automotive sector outweighing growth in aerospace and an upswing in industrial fasteners. Ultimately, Stanley's sales dropped by 5% in the quarter compared to the previous year and 2% on an organic basis. The adjusted gross margin was 30.5% in the quarter, compared to 27.6% in the same quarter of the previous year. (The figures in the following chart depict reported gross margin.)
Although progress in gross margin is commendable, the company is expected to take some time to reach its 35% target. This anticipation of a delayed recovery is reflected in the unsatisfactory sales numbers and in CEO Don Allan's remarks during the earnings call: "We anticipate that choppy markets will extend into the first half of the following year until interest rate reductions have a more substantial impact."
In addition, the disappointing sales added to the company's increase in its quarterly inventories-to-sales ratio.
Excessive inventory levels might prompt the company to limit, or at least postpone, pricing increases to reduce inventory. This is not advantageous for margin.
A stock worth investing in?
Despite this, management confirmed that the cost-cutting measures are progressing well, and the weakness is primarily stemming from interest-rate sensitive sectors. As such, a more favorable interest-rate environment is predicted to bolster its markets through 2025, and the company's margin and inventories-to-sales ratio are expected to improve accordingly. Trading at less than 20 times the midpoint of management's free cash flow guidance for 2024, the stock appears to be a reasonable investment opportunity.
Given the ongoing cost-reduction plan aimed at saving $2 billion annually by 2025, investors may see potential in Stanley Black & Decker's stock, as the manufacturer aims to raise its gross profit margin to at least 35% and boost earnings and cash flow (money). However, the company's third-quarter performance highlighted challenges in certain sectors, resulting in a decrease in sales, and a rise in inventories-to-sales ratio, which might impact pricing strategies and margins (finance, investing).
