Stanley Black & Decker on Tuesday morning delivered solid quarterly results — enhanced by strong cash flow performance, allowing management to raise its full-year guidance. The stock continued its recent rally. Revenue fell 3% year over year to $4.024 billion in the second quarter, edging out the $4.016 billion expected by analysts, according to estimates compiled by LSEG. Organically, sales were up 1% year-over-year. Adjusted earnings per share came in at $1.09, topping the 84-cent estimate and reversing the year-ago quarter’s 11-cent loss. Stanley Black & Decker Why we own it: Stanley Black & Decker is in the later innings of a multi-year restructuring plan. The company launched a series of initiatives designed to generate cost savings, optimize inventory, streamline and simplify the organization, and transform its supply chain. Although the repair and remodeling demand environment is soft due to higher interest rates, management’s cost-cutting plan will create a stronger company for the next cycle. As we wait for the turnaround to play out, we’re getting paid a hefty dividend. Competitors: Bosch, Techtronic Industries and Illinois Tool Works Most recent buy: May 2, 2024 Initiation: June 14, 2023 Bottom Line The strong quarterly numbers and rosier outlook further increased our conviction that management is effectively executing on all the things it can control. The evolving turnaround plans are setting the tool company up for profitable growth as the economic backdrop improves and interest rates come back down. We’re raising our price target to $115 per share from $105 but keeping our 2 rating for the time being as it’s not our style to chase a move like the one we have been seeing lately. Stanley Black & Decker, which also makes fastening and assembly systems, jumped 7.5% on Tuesday’s release following last week’s 9.7% gain. We made a couple of small trims in the position during last week’s rally. But we kept plenty of shares to profit from this kind of performance and future benefits when the Federal Reserve decides to cut rates. The Fed is not expected to cut rates at this week’s meeting. But the market odds point to three cuts this year, starting in September. In the meantime, we continue to see a backdrop in which the professional contractor remains more resilient while the do-it-yourself consumer remains under pressure. Management expects that dynamic to remain in place for the remainder of the year. We expect Fed rates to determine the ultimate path of DIY demand, which is tied into the existing home sales market because one of the first things to do after buying an older home is to spend money on repair and remodeling projects. Right now, many would-be home sellers feel locked because they were able to get a much better mortgage rate during the pandemic than they can now. So, until rates come down enough that people feel comfortable moving, expect DIY to remain pressured. SWK 3M mountain Stanley Black & Decker 3 months While sales were down 3% on a reported basis, they were encouragingly up 1% organically on strength in the company’s DeWalt brand, outdoor categories, and fastening products. On the post-earnings call, CEO Don Allen said the company’s market share position has now stabilized as post-Covid demand has normalized. Notably, DeWalt realized its fifth straight quarter of organic growth, including 2 percentage points of volume growth. Stanley Black & Decker’s cost reduction program has, so far, realized $1.3 billion in savings. It remains on track to deliver $1.5 billion in savings by the end of the year and to reach $2 billion by the end of 2025. This target is also key to management reaching its goal of a 35% gross margin. During Q2, gross margin of 29.2% slightly missed estimates but increased over last year. The company cited supply chain improvement, which is expected to continue. CFO Pat Hallinan said, “Strategic sourcing remains the largest contributor to our transformation savings to date. We are actioning $5 billion of addressable spend across areas such as materials and components, finished goods and indirect expenditures.” Management also attributed improved profitability to lower inventory destocking costs, which were partially offset by targeted investments designed to accelerate market share gain in organic growth. Management stressed their intention to capture further gross margin expansion, with a second-half guide above 31%, bringing the full year gross up to about 30%. The team looks to exit the year at a “low 30s” gross margin rate. Free cash flow of $486 million in the second quarter was significantly ahead of expectations. Along with proceeds from its infrastructure unit divestiture , the team was able to pay down an additional $1.2 billion in debt and further strengthen the balance sheet. They expect to further reduce short-term debt by $400 million to $500 million in the back half of the year. Quarterly commentary Stanley Black & Decker’s largest segment by far — known as Tools & Outdoor — generated sales of $3.53 billion in the quarter, topping the $3.5 billion expected by analysts, according to FactSet. Sales increased 1% organically versus the year-ago period. Operating income exceeded expectations. By product category, Power Tools was down 2% organically on weakness in consumer DIY, hand tools was unchanged year-over-year, and outdoor revenue was up 6% versus the year ago period, “with strong retail volume growth driven by handheld, cordless outdoor power equipment and incremental retail product listings.” Geographically, North American sales were up 1% organic, Europe was down 3% organic driven by declines in France and Italy, while the rest of the world was up 5% organic led by double-digit growth in Latin America. Full-year organic sales in Tools & Outdoor are projected to be down about 1% at the midpoint, with year-over-year margin improvement. Sales in Stanley Black & Decker’s smaller Industrial segment — largely made up of fasteners in end markets such as automotive and aerospace — fell nearly 20% to $496 million in the period, a slight miss versus the $498 million estimate. The large year-over-year decline is mainly attributable to the company’s infrastructure divestment. Sales increased 2% organically versus the year-ago period. Despite sales coming up a tad short, segment operating income came in well ahead of expectations. Within the segment, the Engineered Fastening business was up 2% organic “driven by aerospace growth, which more than offset the market softness in automotive and customer destocking in general.” Aerospace itself was up 24% organic “supported by new business wins and a strong booking rate.” Segment margin benefits from higher prices and strong cost controls. Full-year Industrial segment sales and margins are expected to be relatively flat to slightly positive. Guidance Management updated its full-year earnings outlook, now targeting an adjusted EPS range of $3.70 to $4.50 – up from $3.50 to $4.50, previously, and ahead of the $3.98 expected, at the midpoint. On the call, the team said, “The EPS improvement at the midpoint passes along a portion of the second quarter operating outperformance and includes lower back half interest expense due to accelerated deleveraging.” They added, “Our midpoint assumption for full-year organic revenue is expected to be down a half a percentage point,” which is a bit lower than estimates. Full-year free cash flow is now expected to be between $650 million and $850 million – up from a range of $600 million to $800 million, previously, and also ahead of the $725 million estimate, at the midpoint. On the release, management said the cash flow is supporting a 1-cent per share quarterly dividend increase to 82 cents – resulting in roughly a 3.2% annual dividend yield at current stock price levels. (Jim Cramer’s Charitable Trust is long SWK. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Stanley Black & Decker on Tuesday morning delivered solid quarterly results — enhanced by strong cash flow performance, allowing management to raise its full-year guidance. The stock continued its recent rally.