Black & Decker’s Defensive Margin Strategy May Stunt Competitiveness

Stanley Black & Decker, Inc. (NYSE: SWK) has recovered some of its March coronavirus losses, but it still trades down 16% year over year and 33% year to date. One analyst team sees limits to the company’s recovery.

The Black & Decker Rating

Bank of America analysts Ross Gilardi and Michael Feniger downgraded Stanley Black & Decker to Neutral and cut their price target from $121 to $120.

The Black & Decker Thesis

In the last few years, Stanley has taken great pains to protect its margins from trade wars, and in the last few months, it’s determined to cut another $1 billion in costs to mitigate COVID-19 impacts.

“At some point, all of the focus on margin resilience could come at [the] expense of innovation, long-term competitive position, and distract from a need to onshore more of its supply chain,” Gilardi wrote in a note. “Competitor TTI has grown R&D and headcount far more aggressively in the last 5 years.”

Innovation may be critical, as Stanley’s current portfolio isn’t seen to generate enough demand.

“The business was already headed for a fairly material deceleration prior to COVID-19,” Gilardi wrote. “While point of sales data has apparently rebounded in April, we see room for the power tool market to get more competitive and promotional in the next few years with a weaker consumer and softer housing market.”

The analysts expect investors to turn their focus to 2021 in the next few months and begin to evaluate Stanley Black & Decker based on EV/EBITDA peer comparisons.

SWK Price Action

Shares traded down 4.2% to $108.72 on Tuesday.

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