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On Friday, Morgan Stanley initiated coverage on Stanley Black & Decker (NYSE:SWK) with an Equalweight rating and established a price target of $107.00. The firm's analysis acknowledges the company's impressive execution of its restructuring plan in a challenging environment, projecting gross-margin fueled earnings per share (EPS) growth. However, it also points out that the current valuation reflects an appropriate price based on the more normalized EPS expected for 2026.
The firm anticipates that gross margin (GM) revisions for Stanley Black & Decker will continue to improve over the next twelve months, with consensus estimates reaching 33% by 2026. This figure falls slightly short of the company's own target of a 35% gross margin. The relationship between gross margin and earnings is highlighted, noting that a 100 basis point improvement in GM equates to approximately $1 in EPS.
Stanley Black & Decker's ongoing restructuring efforts have been positively affecting the company's performance, which is expected to bolster investor sentiment. However, the firm also notes that the company faces significant competition and a tepid Tools & Outdoor market without a clear catalyst for recovery on the horizon.
The report further discusses Stanley Black & Decker's strategic simplification of its portfolio, focusing more on its Tools & Outdoor division through increased research and development and selling efforts.
Despite this, the company is characterized as a pure-play in tools, where its peers have generally experienced faster growth and have been able to operate at lower margins. This competitive dynamic is seen as a limiting factor for Stanley Black & Decker's potential re-rating.
Morgan Stanley values Stanley Black & Decker stock at 16 times next twelve months (NTM) EPS, which is below the 18 times multiple observed in the Tools peer group. This valuation reflects the slower growth trajectory for the company and the risks associated with its turnaround strategy.
In other recent news, Stanley Black & Decker reported a slight increase in earnings for the second quarter, beating expectations despite challenging economic conditions. The company attributes its growth to a 2% increase in the professional tools segment, offsetting a slowdown in the do-it-yourself market. Mizuho, an analyst firm, has raised its price target for Stanley Black & Decker from $100.00 to $110.00, maintaining a neutral rating on the shares.
Despite a lowered full-year sales outlook due to sluggish consumer demand, Stanley Black & Decker has implemented cost reduction strategies expected to yield significant savings. The company foresees pre-tax savings reaching $1.5 billion by year-end, with further growth to $2 billion anticipated in 2025.
Stanley Black & Decker also announced plans to invest between $300 million to $500 million to enhance earnings potential, focusing on its DEWALT, CRAFTSMAN, and STANLEY brands.
The company's second quarter results also showed improved gross margins and organic growth. Despite a projected slight decrease in full-year organic revenue and a 1% decline in Tools & Outdoor revenue, Stanley Black & Decker remains optimistic about long-term growth potential.
InvestingPro Insights
In light of Morgan Stanley's coverage initiation, current InvestingPro data and tips provide additional context for Stanley Black & Decker's financial landscape. The company boasts a market capitalization of $15.14 billion, signaling a significant presence in the market. Despite a challenging past performance with a negative P/E ratio of -50.82, analysts are optimistic about the future, expecting net income growth this year. This is further supported by the fact that 12 analysts have revised their earnings estimates upwards for the upcoming period, indicating a potential turnaround in profitability.
Stanley Black & Decker's resilience is also reflected in its dividend history, having raised its dividend for 53 consecutive years, and maintaining payments for 54 years. This consistency is a testament to its commitment to shareholder returns, which is an important consideration for investors looking for stable income streams. Moreover, the company has shown a strong return over the last three months, with a price total return of 18.76%, suggesting a recovery in investor confidence.
For a deeper dive into Stanley Black & Decker's performance and future outlook, there are additional InvestingPro Tips available, providing investors with comprehensive analysis and guidance. To explore these insights, investors can visit https://www.investing.com/pro/SWK, where several more tips await, ready to inform investment decisions with up-to-date and relevant data.
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