Zacks_Analysts' Blog : SWK Still Rated Neutral - Analyst Blog

We currently maintain our Neutral recommendation on Stanley Black & Decker(SWK), New Britain based manufacturer of tools and engineered security solutions.

The company conducts its operations through its three business segments including Security, Industrial and Construction & Do-It-Yourself (CDIY) segments. Of these segments, CDIY contributed 52% of second quarter 2011 total revenue, while Security and Industrial accounted for 24% each of total revenue.        

Although there was a gain of 14.5% year over year in the company’s earnings per share of $1.18 in the second quarter, it failed to meet the Zacks Consensus Estimate of $1.27. Besides, Stanley’s downward revision of its organic revenue growth expectation, based chiefly on weather related headwinds to outdoor product sales and weakness in CDIY sales in Europe, was far from encouraging.

Notwithstanding the below-expected results and lowered guidance, expectation of higher cost synergies from the Black & Decker acquisition and higher earnings guidance is encouraging. The company now expects cost synergies from the BDK acquisition to be around $200 million from $165 million expected earlier for the fiscal year 2011.

Moreover, Stanley remains on track to recover about 80% of the expected 100 basis point headwind from commodity inflation in the second half of 2011 as pricing actions go into effect. Tax rate is likely to be favorable by 1%. Acquisition of Niscayah will strengthen Stanley’s existing security product offerings and also expand its footprint in the international market.

The Niscayah acquisition is expected to save approximately $80 million, more than half of which is likely to be realized by the end of year one after closing. Moreover, the acquisition will be EPS-accretive by $0.20 in year one and $0.45 by year three, excluding the acquisition related charges of $60-$80 million. Stanley will fund the acquisition through its offshore cash resources.

Thus, we maintain a Neutral recommendation on the stock.