[email protected]] Inc. (SWK) November 16, 2015tippie.biz.uiowa.edu/henry/reports15/SWK_fa15.pdf · 2015-11-16 · Stanley Black & Decker, Inc. (SWK) November 16, 2015 Industrials

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Royce Walton [[email protected]]

Stanley Black & Decker, Inc. (SWK) November 16, 2015

Industrials – Machine Tools & Accessories Stock Rating BUY

Investment Thesis Target Price $121-134 We recommend a BUY for Stanley Black & Decker (SWK). SWK is an industry leader with a diverse range of products, brands, and customers. Investors fled in August 2015, fearing that China’s growth rates were slowing. However, a strong third quarter announcement eliminated investors’ fears, driving the stock back to pre-August levels. We believe the company is still trading on par with other industrials and not their peer group. Expect outperformance driven by margin recovery, stock buybacks, and strong brand management. Drivers of Thesis

Disciplined management team: SWK’s management team recently ended a two-year acquisition moratorium to re-balance their capital structure, showing great focus during the period. They will also re-evaluate their low-margin security segment in the second half of 2016. We believe both point to a trustworthy and focused management team.

Strong brand loyalty and recognition: The DeWalt label fetches premium pricing among the construction industry, and the Stanley and Black & Decker names are popular at lower prices. These brands will drive operating margins above 14% throughout the forecast period.

Strong new housing starts in U.S. balanced with FX headwinds: New housing construction has had a good run this year, and we expect SWK’s consumer do-it-yourself segment to perform well as a result. However, FX headwinds will offset these gains, resulting in modest growth in 2015 and just 2% growth in 2016.

Risks to Thesis

Competition from Asia: Companies like Makita and Techtronic Industries pose a threat to SWK because their production costs are lower. Price competition is always possible, but SWK has done a good job avoiding it to date.

Security segment decision: We expect management to keep this segment if they can improve their performance over the next six-months. However, if they split or sell this segment, we would have to re-examine our models.

Henry Fund DCF $128.06 Henry Fund DDM $105.81 Relative Multiple $110.72 Price Data Current Price $104.44 52wk Range $90.08 – 111.18 Consensus 1yr Target $116.46 Key Statistics Market Cap (B) $15.64 Shares Outstanding (M) 149.73 Beta 0.97 Dividend Yield 2.17% Est. 5yr Growth 7.60% Price/Earnings (TTM) 21.2 Price/Earnings (FY1) 18.2 Price/Sales (TTM) 1.39 Price/Book (mrq) 2.79 Profitability Operating Margin 14.99% Return on Assets (TTM) 4.80% Return on Equity (TTM) 11.68% Data Source: FactSet

Earnings Estimates 2012 2013 2014 2015E 2016E 2017E

EPS $5.42 $3.16 $4.87 $5.91 $6.43 $6.97

growth 33.2% -41.7% 54.3% 21.2% 8.9% 8.4% Data Source: FactSet

12 Month Performance Company Description

Data Source: FactSet

Stanley Black & Decker is a global supplier of power and hand tools, industrial equipment, automatic sliding doors, and electronic security systems. The company possesses numerous brands with market leadership positions, and they win market share through positive customer experiences. SWK continuously monitors the market for possible acquisition targets, and they select companies with a unique geographical or customer exposure.

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Stanley Black & Decker Snap-On

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SWK S&P 500

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EXECUTIVE SUMMARY

SWK is the largest tool producer by market cap, and their brands are well known throughout the world. The company has been a solid performer this year as they re-balanced their capital structure and outperformed the overall industrial sector.

Recent news describing weakness in the emerging markets hit SWK’s stock price in August. After the company beat consensus estimates in Q3 2015 and raised their full-year guidance, the stock price surged back. However, they still trade at a discount to their peers.

SWK is being penalized because their business currently includes an underperforming security segment. Originally added for diversity and growth purposes, this segment has held the company back. Management recently announced they were willing to consider parting with the low margin business in 2016. We believe this would increase the company’s overall margins and shift their focus back on the core business.

COMPANY DESCRIPTION

Data Source: Bloomberg

SWK traces their roots all the way back to 1843, when Fredrick Stanley opened up a small shop in Conneticut. Over time, it developed into a leading producer of hand tools. In 2010, the company added Black & Decker, which was founded in 1901.1

The acquisition was a large one, and SWK’s market cap rose from around $4 billion at the end of 2009 to over $11 billion at the end of 2010.2 As a result, integration was slow. Sales growth did not recover until 2013, when it looked like the combined company was finally firing on all cylinders. Now, SWK is nearing their pre-acquisition margins.

In the recent past, the company’s strategy for growth has been to focus on acquiring brands in the emerging markets, investing in their security segment, and consolidating tool brands. However, the security segment has not performed well, and the company is now considering leaving the security business.

Segments

SWK reports their revenues in three reportable segments, which they break down further into separate operating businesses:

Construction and Do-It-Yourself (CDIY) o Professional power tools o Consumer products o Hand tools and storage o Fastening and accessories

Industrial o Industrial and automotive repair (IAR) o Engineered fastening o Infrastructure

Security o Convergent security solutions (CSS) o Mechanical access solutions (MAS)3


CDIY

The CDIY segment is SWK’s largest segment with over $5.6 billion in revenues or nearly 50% of the company’s total revenues. The segment sells power tools under the professional power tools sub-segment that include drills, impact wrenches, saws, and sanders. The consumer products sub-segment generates revenues by selling lawn and garden equipment and power tools to the at-home user. The hand tools sub-segment includes sales of levels, measuring devices, knives, toolboxes, and storage

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containers. The final sub-segment is fastening and accessories, which includes revenues from nail guns, staplers, drill bits, and saw blades. Over 60% of CDIY revenues stem from sales in North America, making this segment more sensitive to the American and Canadian economies than SWK’s other segments.

Data Source: SWK 2014 Earnings Call

The CDIY segment distributes products to end-users directly or through retailers like Home Depot or Lowe’s Home Improvement. End-users range from professional construction workers to do-it-yourself home improvement consumers.

CDIY owns several prominent brands including Stanley, DeWalt, Black and Decker, Porter Cable, Bostich, Powers, and GQ Tools, which is a leading power tool manufacturer in China. Stanley, DeWalt, and Black and Decker have particularly strong customer loyalty and presence, which is the primary driver for the nearly 16% operating margins in this segment.

SWK added several new business units to the CDIY segment during restructuring in Q1 2015. They moved several business units from the security and industrial segments and added them to the CDIY segment because their strategies were complementary.4 The CDIY segment is now broadly classified as “Tools & Storage”, but we refer to this segment as CDIY in this report and our model to eliminate confusion. While the company does not provide segment-specific growth expectations, we expect the additions will drive 29% revenue growth for CDIY in 2015. We expect 2% revenue growth in 2016 and 4% long-term for CDIY as economies recover worldwide.

Industrials

The industrials segment makes up just over 30% of total revenues, and a slightly larger portion of profits due to

their 17% profit margins. It historically contained three sub-segments, industrial and automotive repair (IAR), engineered fastening, and infrastructure. However, SWK split-up the IAR segment and sent some business units to the CDIY segment with others remaining in the industrial segment.

The engineered fastening sub-segment sells welding equipment, riveting tools, plastic and metal fasteners, and high-strength structural fasteners. Customers typically include automobile companies, the aerospace industry, and other manufacturers who purchase products directly from SWK.3

The infrastructure sub-segment serves the oil & gas industries and manufacturing companies through the sale of piping tools and equipment. While the company does not install or supply piping, their tools are used in assembling both large and small diameter pipelines.3

While CDIY generates 64% of revenues in North America, industrials generates only 39% in this region with 29% coming from emerging markets (shown below.)5 Volatility in the emerging markets will make growth in the industrials segment more volatile as well. We also expect the industrial segment to struggle from low oil prices and falling production through 2016. In 2015, we expect a 7% decline in revenues, recovering to 2% growth in 2016. Long-term, we expect this segment to see 2% revenue growth, but it will remain tightly bound to oil production.


Security

The security is the final reportable segment for SWK, and it makes up just over 20% of the overall revenues. With profit margins near 10%, the security segment is also the least profitable. SWK breaks down this segment into two

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smaller sub-segments, convergent security solutions (CSS) and mechanical access solutions (MAS).

CSS provides security equipment including video surveillance systems, fire alarm systems, and electronic access systems. This sub-segment also provides installation and monitoring services alongside their product sales. SWK sells these products to a wide range of customers from hospitals and schools to restaurants and retail businesses.

MAS provides a similarly wide range of products including automatic doors, locksets, and keyless entry systems. Again, the customer base ranges widely from small business to large regional hospitals.

Examples of Mechanical Access Solutions Products

Source: Company website

The security segment primarily collects revenues from North America (56% of revenues) and Europe (36% of sales), which means it has the least exposure to emerging market volatility. However, moving some of the healthcare business from the security segment to the CDIY segment, means that security will see a 44% drop in revenues in 2015. We expect this segment to see solid growth in the range of 3 to 4% throughout the forecast period and in the long-term. We like the segment’s geographic diversity, customer diversity, and wide exposure to economic trends.


Company Analysis

Below is a description and our analysis of SWK’s four strategic objectives, which have been relatively unchanged since Stanley and Black & Decker merged in 2010.

The company’s first strategic goal is to continue adding growth to the business portfolio by investing in growing businesses or those with emerging market exposure. We believe that the exposure to emerging markets challenges SWK’s management team in several key ways. First, these markets are more volatile than North America and Europe, making the planning and forecasting process more difficult. Second, sales in emerging markets can be pressured by currency exchange rates during times of a strong dollar. In the long-term, we believe that these markets do present significant growth opportunities and an opportunity to establish SWK as an international company. However, SWK’s commitment to emerging markets will be tested in the short term. We expect management to remain steady on this front based on their comments in Q2 and Q3 of 2015. Expect revenue growth to remain in the mid-to-low single digits in the next five years due to slowing demand and FX headwinds in the emerging markets.

The second strategic objective is sticking to markets where a strong brand is important and cost leadership is possible. It is obvious that SWK’s ability to manage brands and leverage them to achieve premium pricing is a core strength. Additionally, the company’s commitment to the Stanley Fulfillment System, or SFS (discussed in more detail below), helps them achieve profit margins in the high-single digits. We believe that SWK has done a good job of sticking to its core businesses and leveraging its brand and cost management strengths. One example of

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this was the addition of a Chinese toolmaker GQ Tools. While this acquisition increased their exposure to international markets, it was also an opportunity to add another quality brand to the CDIY portfolio. We expect the company to continue adding brands and business selectively, enabling them to protect or increase margins.

SWK’s third strategic goal is to opportunistically consolidate the tool industry through acquisitions and make additions to the security segment selectively. While we like the company’s position as a large tool producer in a diverse market, we believe the company would benefit from selling all or a portion of its security segment. This segment has struggled to produce the above average margins that the other segments achieve, and we do not believe that the company can leverage its brand management capabilities in this sector. Management hinted that they will re-evaluate the strategic fit in 2016, but until then, they remain committed to improving this segment’s profitability. We believe that when SWK moved portions of this segment to the CDIY segment, they showed their hand in regards to their 2016 decision. They may have moved the most profitable portions of the security segment to the CDIY unit, which they have no plans on splitting or selling. This enables them to split or sell the security segment in its entirety in 2016. However, this also could have been a move to increase margins in the security segment by reassigning lower margin businesses to the CDIY segment. Without knowing the profitability of these pieces, we are left to guess. We believe the former to be true and expect the security segment to be split or sold in 2016.

Stanley Fulfillment System

Source: SWK 2014 Annual Report

The final strategic objective focuses on using the Stanley Fulfillment System (SFS) to drive growth and efficiency. SFS is an enterprise wide system for improving SKW’s current methods and innovating new ways to manufacture and sell products. While subscribing to an operational and manufacturing improvement strategy is not a unique strategy, we believe that the lack of a system would be concerning. We also believe that SFS gives SWK the opportunity to identify and eliminate redundancies after acquisitions.

We expect SWK to continue their margin recovery through 2016, as highlighted in the chart below. Additionally, if they were to split or sell the security segment, SWK could achieve operating margins above 16% and profit margins near 10%. However, this move would concentrate SWK’s revenues and reduce their emerging market exposure.

Data Source: Company Financial Statements and Henry Fund Estimates

RECENT DEVELOPMENTS

Notably, there is very little news flow surrounding SWK aside from earnings reports. In previous years, M&A activity was the only other headline-driving topic. However, at the end of 2013, the company announced an acquisition moratorium, which would enable them to re-balance their capital structure through share repurchases and debt payments.6 SWK avoided making acquisitions in 2014 and they have not made any purchases in 2015. As a result, we expect SWK’s debt-to-equity ratio to fall below 1.3 from over 1.4 in 2013 and 2014. Management hinted at a adding smaller businesses to the tools & storage and fastening sub-segments, but we expect these to be

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relatively small deals based on management’s comments.6

Q3 2015 Earnings Results

In Oct 2015, SWK reported their third quarter results, and the company raised their full-year EPS from $5.70-5.90 to $5.80-5.95 (we expect EPS of $5.82 in 2015.)

The company beat consensus revenue estimates by less than 1% but surpassed consensus EPS estimates by nearly 2%. Combined with increased guidance, SWK’s stock price surged 7% on October 22. While we are encouraged by the earnings beat and increased guidance, we believe these variables do not fully explain the jump.

In August, the company’s stock price was hit hard, as were many other companies with international (specifically Chinese and emerging market) exposure. We expect that many investors left the company, expecting their emerging market exposure to act as a headwind in the near-term. However, when the company increased their full-year guidance, this drew many investors back.

The company does not expect to make any significant moves away from the emerging markets, but they did say they would be more selective when investing in the next year. We believe this is a wise strategy, as it enables the company to invest in their core business. Additionally, as these markets recover in the longer-term, SWK can build on their existing structure.

INDUSTRY TRENDS

Emergence of International Brands

Two Asian-headquartered companies have been establishing themselves as popular brands in the power tool industry. Techtronic Industries (TTI) owns the Milwaukee and Ryobi brands, while Makita Corporation sells its products under the Makita brand name. These companies have an advantage over some U.S. companies because their costs of production are lower, and they price their products lower as a result. We believe that this pricing pressure will test the strength of U.S. producer’s brands and operating processes.

SWK produces some tools overseas; their DeWalt brand is produced in the United States with international materials. This is a perfect example of a product whose brand strength will be tested by the lower-priced Asian brands. We believe SWK’s brands are strong enough to compete, and this threat has the added benefit of forcing

management to scrutinize their operating processes. In this situation, we expect the brand to protect margins from downside while investments in the manufacturing process will drive margin upside.

Increased domestic demand due to new housing construction

Data from the United States Department of Housing and Urban Development highlights how quickly new homes are being built in the U.S. Total new housing starts are up 17.5% compared to September 2014. The Northeast, South, and West regions are performing particularly well with growth above 20%, while the Midwest declined nearly 18% since last September.7

We believe this is a good sign for SWK for two reasons. First, as builders rush to meet the increased demand from low financing costs and a relatively strong economy, they will invest in professional-grade tools. This is one area where SWK separates themselves from their Asian competitors, as their brands are known for durability and quality.

Secondly, as new homeowners move into their homes, they begin to undertake home projects. Whether it is decorating after move-in or conducting do-it-yourself renovations down the road, we believe that buying a new home is a leading indicator for buying tools. This aspect is good for the industry in general. Maintaining a diverse range of products at various price ranges will enable SWK to capture this growth.

We expect solid revenue growth in the CDIY segment, approaching 6% in 2017, slowing to 4% long-term as the new construction market slows.

MARKETS AND COMPETITION

Competition within the tools industry occurs on several levels:

price

product quality and durability

range of products offered

brand recognition

brand loyalty

Tool manufacturers can pursue a strategy that delivers high quality products at a premium price or they can provide lesser-quality products at a reduced price. Additionally, if a tool company can build a strong brand

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loyalty among customers, customers willingly pay premium prices to stick with their brand.

The industry is mature, consolidated, and unlikely to be disrupted in the near future. The top two producers, SWK and Snap-Op, own over 70% of the market share, and we do not expect this to change significantly in the future.

Data Source: IBISWorld8

The barriers to entry are relatively high in this industry, because of the capital expenditures required to establish production facilities. Additionally, both of the top two industry leaders have excellent brand loyalty and recognition, which raises the barriers even higher.

Peer Comparisons

We selected the following peer group because they operate in the power and hand tool manufacturing industry. However, a broader group could be established by including lawn and garden and home appliance companies. We selected the former, because we do not believe that these companies compete for directly for customer wallet share. Selecting the latter method would imply that customers make decisions like hammer vs. coffee pot or power drill vs. weed trimmer, and we do not believe this is realistic.

Market Cap ($B)

2014 Sales ($B)

Op. Margin

Profit Margin

P/E (TTM)

Snap-On $9.7B $3.5B 19.6% 12.1% 21.3

Makita $7.1B $3.8B 17.3% 10.9% 22.6

TTI $6.8B $4.8B 7.5% 6.3% 22.3

SWK $15.7B $11.3B 15.0% 6.7% 18.8

Data Source: Bloomberg and Company Financial Statements

Snap-On, Inc. (SNA)

SNA is a U.S. tool company that has a very strong brand in the auto and auto repair industry. Over half of SNA’s sales come from the sale of tools (power and hand), while the rest comes from the sale of diagnostic equipment and specialized auto repair equipment.9

While SNA distributes their products through many of the same channels as SWK, their use of franchisees is unique. Franchisees operate “mobile tool centers,” or vans, and provide sales and services to customers in their area. 9

SNA has a strong market share of 34% in the tool industry, however, we do not believe SNA completes directly with SWK. Since their tools are marketed towards automotive mechanics, SNA operates in a niche market. Alternatively, SWK has more exposure to the construction industry and less exposure to the automotive industry.

Working in a niche market has paid-off well for SNA. With industry leading profit margins above 12% and operating margins near 20%, SNA deserves to trade at a premium to SWK.9 We believe the company’s extraordinary margins stem from two points. First, the company has a very old and strong brand among automotive and industrial customers. Second, the company has maintained a laser-like focus on their core business, which prevents them from diluting margins with lower margins businesses.

Overall, we like SNA’s strong performance historically, and their strong brand will continue to drive above-average margin performance. However, we believe that they are fairly valued based on comparisons of their current P/E to historical levels (shown below.)


Stanley Black & Decker,

37%

Snap-On Tools, 34%

Makita, 4%

Techtronic, 4%

Other, 21%

Tool Producer Market Share

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Makita Corporation


Headquartered in Japan, Makita Corporation is much more geographically diverse than their competitors. While they were founded in 1915, the company did not start manufacturing and selling tools until 1958. Prior to this, the company specialized on electric motors.10

Today, over 64% of the company’s sales are generated from selling power tools under the Makita brand name. The remainder is from lawn and gardening equipment and repair parts, which are also sold under the Makita name.11

Makita’s products have a strong presence in the market place and they compete in the middle price range. We like this strategy, but the dependence on one brand increases the pressure on the company’s management team to maintain positive momentum surrounding their brand. One misstep could cause the entire company’s portfolio to be effected.

The company’s singular focus on producing tools also enables them to capture margins above those of SWK, but it also limits their size. We like this aspect of their strategy, but we believe they would benefit from the addition of a few more brands.

Their geographic diversity may make operations more complex than a company like Techtronic, but it also increases their diversity and exposure to growing markets. This aspect of their strategy is similar to SWK’s, and we believe it shows that SWK can increase their exposure to emerging markets without losing operational efficiencies.

Techtronic Industries (TTI)

Sales by segment and geography through June 2015

Source: Techtronic 1H 2015 Interim Report

Founded in 1985, TTI is one of the younger players in the tool manufacturing sector. However, the company currently possesses brands that have a long history, similar to SWK and SNA. The company’s brands include Milwaukee, Ryobi, Empire, Hover, Oreck, and Dirt Devil. Despite having their headquarters in Hong Kong, the company generates over 74% of their sales in North America. The company also has a much tighter focus than SWK, with 79% of sales generated from the sale of power tools and the rest from vacuums and other floor cleaning devices.12

We believe that this is a solid strategy to pursue, and with the elimination of all or part of the security segment, SWK will be on their way to a similar strategy. However, TTI is the smallest and least profitable company in our peer group. While their gross margins are in the same 30% range as SWK, their operating margins are much lower than the rest of the industry at 7.5%.2

We believe that part of the issue is that their brands do not fetch the premium prices that SWK and SNA capture. TTI’s tool brands typically compete at the middle or low end of the market. To offset this, the company must sell higher volumes. In general, we like SWK’s premium brand strategy better.

ECONOMIC OUTLOOK

GDP Growth

We forecast real GDP to grow 2.6% over the next six months with 0.7% growth in inflation. While we have a strong outlook for companies operating domestically, we are less confident in those who operate outside the United States. Slowing growth in China and the emerging markets as well as continued issues in Latin America and Europe will hurt U.S. companies operating in those areas. In the U.S., we expect that consumers will continue to increase their discretionary spending as unemployment

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and oil prices remain at historic lows. This is mixed news for SWK as they have 48% of revenues coming from the U.S. and over 16% from China and the emerging markets.

Discretionary Spending

Source: Gallup13

The Gallup graphic above highlights the result of a monthly poll of U.S. consumers. Gallup asks consumers how much money they spent yesterday. Notably, this number includes gasoline, and the dip near the end of 2014 is likely a result of lower gas prices. As fuel prices remain low, we expect this number to stay flat or slightly increase. This should benefit the tool manufactures. However, we are not confident that it will trickle down to any one individual company’s income statement. Especially when combined by the positive trends in new housing constructions, which is discussed above.

Going forward, we expect the tool manufacturers to outperform the rest of the industrial sector because of these trends. While they may face some headwinds as the strengthening dollar pressures international sales, we expect domestic sales to win out. This will result in low single-digit revenue growth in the next two years.

Interest Rates

The Federal Reserve decided not to raise rates in September, but we still expect rates to increase before the end of 2015. The low interest rate environment enables industrial companies to take on debt to fund growth and acquisitions. SWK has focused on paying down their debt during their two-year acquisition moratorium, and their current debt maturity schedule is shown below. We believe the company be cautious about acquisitions funded by expensive debt in the future. However, we believe that a slow increase in interest rates will enable SWK to secure debt at low levels for the next one to two years.

SWK Debt Maturity Schedule

Source: Thomson One

CATALYSTS FOR GROWTH

Stanley Fulfillment System

While we project operating margins to remain around the 14% level, but SFS makes margin expansion a real possibility. Whenever the company adds another business unit through acquisition, they can rely on their proven system to incorporate them. Their focus on making their business as simple as possible, using lean manufacturing, and optimizing their global supply systems will pay dividends when the acquisition moratorium is lifted. Additionally, SFS gives the company a way to optimize their sales planning. Each quarter SWK determines their sales expectations, and they use SFS to match production levels. This helps them maintain moderate inventory levels and maximize their working capital turns.

Emerging Markets

One of SWK’s core strategies has been to invest in emerging markets through acquisitions, and in two of the last three years revenues from Asia have outpaced total revenue growth. Despite current concerns in the market about slowing growth in the emerging markets, management expects them to continue driving growth in the long-term. The company’s most recent move was when they acquired a 60% stake in the third leading mid-priced tool brand in china, GQ Tools. We believe this was a good strategy for entering into a competitive market. It gives SWK the ability to learn about the demand drivers in China while working with an existing brand. We agree with management and expect the revenues from the emerging markets to continue to grow. Overall,

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this will lead to a more diversified company. While some investors may not appreciate the volatility that comes with emerging market exposure, it provides SWK with the opportunity to outperform U.S. focused tool companies.

INVESTMENT POSITIVES

•SWK’s strong brands compete at various price levels, giving them a tight hold on the market. At lower price levels, SWK’s brands have some of the strongest brand recognition in the industry, and at higher price levels, customers’ brand loyalty is unparalleled. •SWK is reaching pre-recession margin levels, and we believe there are drivers for even further margin growth. These include SFS and the possible elimination of part or all of the security segment. •SWK provides exposure to the industrial industry without the headwinds that many industrial companies are currently fighting.

INVESTMENT NEGATIVES

•SWK has been acquisitive in the past, but we believe in management’s discipline and focus. Regardless, there is an opportunity that a future deal goes wrong and requires years of investment to recover. •SWK currently trades near all-time high P/E levels, but we believe this is true for many companies in the market. If a large-scale pull back occurs, SWK would be impacted because it is trading near the top of its range. •Competition from Asian tool companies could introduce greater price competition, challenging customers’ loyalty to SWK’s brands.

VALUATION

Sales Growth

With three quarters complete for 2015 and increased guidance from management, we are relatively confident in our sales growth estimates for 2015. In 2016, we expect currency exchange rates and slow growth in emerging markets to affect SWK’s overall growth. However, in 2017, we expect these issues to fade, enabling SWK to achieve more typical growth. Long-term, we believe SWK’s revenues should grow in-line with the broader economy in a range of 3-5% per year.

Sales Growth Estimates

2015 2016 2017 2018 2019 CDIY 29.0% 2.0% 6.0% 4.0% 4.0%

Industrial -7.0% 2.0% 6.0% 2.0% 2.0%

Security -44.0% 3.0% 4.0% 4.0% 4.0%

Total 3.2% 2.1% 5.8% 3.4% 3.5%

Source: Henry Fund Estimates

Operating Margins

SWK’s margins have been recovering since the recession and the company made great progress in 2014. We expect 2015 to be down slightly based on the previous three quarters and management’s guidance. However, we believe the company has the ability to reach 2014 levels again. Without eliminating part or all of the security segment, SWK will maintain margins in the range of 14-15% throughout the forecast period. As mentioned above, the company could achieve operating margins above 16% if the security segment is paired down. Our model shows low sensitivity to changes in cost of goods sold and SG&A expenses (shown below.) The benefits of the Stanley Fulfillment System are particularly notable here, where SWK has maintained SG&A expenses in a tight range from 22-24% through recent history. We believe that they can continue this, and possibly reduce their expenses with further improvements through SFS.

Data Source: Henry Fund Estimates

WACC Calculation

We used a weighted average cost of capital of 6.98% in our models. We calculated this by making several assumptions. First, we used a risk-free rate of 2.87%. This was the 30-year Treasury bond yield at the time of our report. While this rate may increase in the future, we feel that it is the best long-term rate available. We also selected a market risk premium of 4.85%. This premium is the Henry Fund consensus estimate based on historical and implied forward-looking data. Next, we used a cost of debt based a SWK bond with a maturity of December 2053. As highlighted in the table below, at a slightly

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higher WACC of 7.48%, our model produces a target price of $109, while a lower rate of 6.48% produces a target price of $152.

Data Source: Henry Fund Estimates

Beta Calculation

Beta Samples

5-yr weekly 2-yr weekly 1-yr weekly Average 1.099 0.880 0.932 0.970

Data Source: Bloomberg We calculated SWK’s beta to be 0.97 by taking an average of the beta samples in the table above. We believe that this is relatively reliable because the company’s stock price is driven by many of the same drivers as the overall economy. Sensitivity analysis of our beta calculation (highlighted in the table in our operating margins section) shows moderate sensitivity. At a beta of 1.07, the resulting DCF model price is $114. At a beta of 0.87, the target price rises to $146.

EPS Estimates

EPS Estimates vs. Consensus

2015 2016 2017 2018 2019 HF Estimate $5.91 $6.43 $6.97 $7.34 $7.72

YoY Growth 21.2% 8.9% 8.4% 5.3% 5.3%

Consensus $5.82 $6.54 $7.33 $8.32 $8.74

YoY Growth 19.4% 12.4% 12.1% 13.5% 5.0%

Data Source: FactSet The table above shows a comparison of our EPS estimates to consensus. Despite the modest margin growth expectations, we believe SWK will drive EPS growth through growth in the emerging markets and share repurchases. While our estimates are above consensus for 2015, our future growth rates are much lower. We believe that consensus is more optimistic about the margin expansion opportunities. However, in our final

year, our EPS growth estimates are relatively close to consensus near 5.0%.

Valuation Model Results

Our DCF/EP model results in a target price of $128. Our DCF price is above the current price of $104, which implies a nearly 23% upside. However, based on our sensitivity analysis of the WACC and our expectations for interest rates to rise, we believe our target price may be overly positive. With an addition of 50 basis points to the WACC, our target price decreases, leaving us with just under 5% upside. Our dividend discount model produces a target price of $106, which is much lower than our DCF forecast closer to the current price. We believe this is also relatively reliable, based on the company’s dividend history. At this price, there is slightly less than 2% upside. While our DCF target price may be a slight overestimate due to increasing interest rates, we believe that the DDM may be a slight underestimate. Lastly, our relative valuation model generates a price of $110, which represents 6% upside. We believe this number is also relatively reliable because of the similarities between companies in our peer group. Peers include the companies we described in our peer analysis and Toro Company, because we believe their performance is driven by factors similar to SWK. However, they may reflect the higher growth areas of SWK’s business. For this reason, we believe this target price may be a slight underestimate as well. For these reasons, we used our DCF model results to generate our target price range of $121 to $134. While this does present significant upside compared to the current price, we recommend closely monitoring SWK’s stock performance if there is any more negative news out of Asia or interest rates rise more than 25 basis points initially. As we saw in August, these reports hit SWK hard, and they could present an even better buying opportunity.

KEYS TO MONITOR

Management expects to make a decision about the strategic fit of the security segment by the second half of 2016. We think the company should strongly consider parting ways with at least a portion of the segment. Doing so would bring SWK’s margins in line with peers,

Page 12

and it would enable them to narrow their operational focus. If however, margins expand between now and then, we suspect that management will hold on to the security segment in the near-term.

As we approach the final month of 2015, SWK’s self-imposed acquisition moratorium will be lifted. We do not expect the company to make any large acquisitions in the next year, because doing so would cause the company’s capital structure to slip to pre-2013 levels quickly. We believe that depending on the company, SWK could be penalized by the market for a big acquisition. Expect small acquisitions, with the goal of adding emerging market brands to the CDIY segment.

REFERENCES

1. Company website: www.stanleyblackanddecker.com

2. Bloomberg 3. SWK 2014 10-K 4. SWK 2015 Q1 10-Q 5. SWK 2014 Full-year Earnings Call 6. SWK 2013 Q3 Earnings Call Transcript 7. United States Census Bureau website:

http://www.census.gov/construction/nrc/index.html

8. Blau, Gavin. “Power Tool Manufacturing in the US” IBISWorld. March 2015.

9. SNA 2014 10-K 10. Company website:

http://www.makita.biz/company/history.html 11. Makita 2015 Annual Report 12. Techtronic 1H 2015 Interim Report 13. Gallup website:

http://www.gallup.com/poll/185333/little-movement-consumer-spending-august.aspx?utm_source=CONSUMERS&utm_medium=topic&utm_campaign=tiles

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not

represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Stanley Black & Decker, Inc.

Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

CDIY 5,001,400 5,271,400 5,559,300 7,171,497 7,314,927 7,753,823 8,063,975 8,386,534

YoY Growth -4.49% 5.40% 5.46% 29.00% 2.00% 6.00% 4.00% 4.00%

Industrial 2,739,300 3,302,600 3,498,800 3,253,884 3,318,962 3,518,099 3,588,461 3,660,231

YoY Growth 3.82% 20.56% 5.94% -7.00% 2.00% 6.00% 2.00% 2.00%

Security 2,281,700 2,315,500 2,280,500 1,277,080 1,315,392 1,368,008 1,422,728 1,479,638

YoY Growth -8.78% 1.48% -1.51% -44.00% 3.00% 4.00% 4.00% 4.00%

Consolidated 10,022,400 10,889,500 11,338,600 11,702,461 11,949,281 12,639,930 13,075,165 13,526,403

YoY Growth -3.41% 8.65% 4.12% 3.21% 2.11% 5.78% 3.44% 3.45%


Income Statement


Net sales 10,190,500 11,001,200 11,338,600 11,702,461 11,949,281 12,639,930 13,075,165 13,526,403

Costs and expenses

Cost of sales 6,485,900 7,068,300 7,235,900 7,431,063 7,528,047 7,963,156 8,237,354 8,521,634

Selling, general & administrative expense 2,509,100 2,700,900 2,575,000 2,691,566 2,748,335 2,907,184 3,007,288 3,111,073

Provision for doubtful accounts 11,300 13,700 20,900 16,834 17,189 18,182 18,808 19,457

Other expenses (income) - net 301,900 287,400 239,700 298,105 304,392 321,986 333,073 344,567

Restructuring charges & asset impairments 175,100 176,100 18,800 103,364 105,544 111,645 115,489 119,475

Gain (loss) on debt extinguishment (45,500) (20,600) 100 - - - - -

Interest income 10,100 12,800 13,600 16,226 16,704 16,772 17,128 17,325

Interest expense 144,200 160,400 177,200 156,059 160,653 161,314 164,735 166,632

Earnings from continuing operations before income taxes 527,600 586,600 1,084,800 1,021,696 1,101,824 1,173,236 1,215,547 1,260,891

Income taxes on continuing operations 78,900 69,300 227,100 209,441 225,867 240,506 249,179 258,474

Earnings from continuing operations 448,700 517,300 857,700 812,255 875,957 932,731 966,368 1,002,416

Less: net earnings (loss) attributable to non-controlling interests (800) (1,000) 500 - - - - -

Net earnings from continuing operations attributable to common shareowners 449,500 518,300 857,200 812,255 875,957 932,731 966,368 1,002,416

Earnings (loss) from discontinued operations before income taxes 503,500 (42,000) (104,000) 81,516 83,235 88,046 91,078 94,221

Income taxes benefit (expense) on discontinued operations (69,200) 14,000 7,700 7,947 8,115 8,584 8,879 9,186

Net earnings (loss) from discontinued operations 434,300 (28,000) (96,300) 89,463 91,350 96,630 99,957 103,407

Net earnings (loss) 883,800 490,300 760,900 901,718 967,308 1,029,361 1,066,325 1,105,823

Weighted average shares outstanding - basic 163,067 155,237 156,090 152,666 149,571 146,779 144,271 142,027

Net earnings (loss) per share - basic $5.42 $3.16 $4.87 $5.91 $6.47 $7.01 $7.39 $7.79

Dividends per common share $1.80 $1.98 $2.04 $2.63 $2.88 $3.12 $3.29 $3.47


Balance Sheet


AssetsCurrent assets

Cash & cash equivalents 716,000 496,200 496,600 1,171,412 2,443,413 3,546,858 5,285,446 6,512,648 Accounts & notes receivable, net 1,538,200 1,633,000 1,396,700 1,589,307 1,622,828 1,716,625 1,775,734 1,837,016

Inventories, net 1,316,600 1,485,200 1,562,700 1,619,435 1,653,591 1,749,166 1,809,396 1,871,840

Prepaid expenses 199,600 171,000 180,500 228,965 233,794 247,307 255,823 264,652

Assets held for sale 133,400 10,100 29,500 38,877 39,697 41,991 43,437 44,936

Other current assets 194,500 173,200 282,800 232,113 237,008 250,707 259,340 268,290

Total current assets 4,098,300 3,968,700 3,948,800 4,880,108 6,230,331 7,552,654 9,429,174 10,799,381

Property, plant & equipment, gross 2,696,500 3,035,300 3,080,700 3,356,097 3,553,607 3,761,127 3,941,921 4,108,671

Less: accumulated depreciation & amortization 1,362,800 1,550,000 1,626,600 1,855,334 2,021,191 2,140,140 2,265,118 2,374,000

Property, plant & equipment, net 1,333,700 1,485,300 1,454,100 1,500,763 1,532,416 1,620,987 1,676,803 1,734,671

Goodwill 7,021,100 7,565,300 7,275,500 7,275,500 7,275,500 7,275,500 7,275,500 7,275,500

Customer relationships, net 1,079,800 1,194,200 938,900 1,119,676 1,143,292 1,209,372 1,251,015 1,294,189

Trade names, net 1,681,700 1,703,300 1,668,600 1,585,170 1,505,912 1,430,616 1,359,085 1,291,131

Other intangible assets, net 173,100 170,100 144,200 136,990 130,141 123,633 117,452 111,579

Other assets 456,300 448,200 419,000 458,467 468,136 495,194 512,245 529,923

Total assets 15,844,000 16,535,100 15,849,100 16,956,674 18,285,727 19,707,956 21,621,274 23,036,374

Liabilities

Current liabilities

Short-term borrowings 1,100 392,700 1,600 100,936 108,435 110,722 117,122 121,155

Current maturities of long-term debt 10,400 9,900 5,900 6,000 4,500 4,500 494,500 494,500

Accounts payable 1,350,100 1,575,900 1,579,200 1,545,320 1,577,913 1,669,114 1,726,587 1,786,173

Accrued expenses 1,681,500 1,236,200 1,221,900 1,288,056 1,315,223 1,391,240 1,439,145 1,488,812

Liabilities held for sale 30,300 6,300 23,400 13,130 13,407 14,181 14,670 15,176

Total current liabilities 3,073,400 3,221,000 2,832,000 2,953,442 3,019,478 3,189,758 3,792,024 3,905,816

Long-term debt 3,526,500 3,799,400 3,839,800 3,621,036 3,723,107 3,736,563 3,811,751 3,852,963

Deferred taxes 946,900 914,400 992,700 1,017,997 1,043,939 1,070,543 1,097,824 1,125,800

Post-retirement benefits 816,300 744,200 749,900 742,401 734,977 727,627 720,351 713,147

Other liabilities 753,800 975,600 922,800 1,023,038 1,044,616 1,104,993 1,143,041 1,182,489

Total liabilities 9,116,900 9,654,600 9,337,200 9,357,914 9,566,117 9,829,484 10,564,992 10,780,216

Shareholders' equity

Common stock 4,915,800 5,320,900 5,169,400 5,251,812 5,334,224 5,416,635 5,499,047 5,581,459

Retained earnings 3,299,500 3,484,900 3,926,300 4,426,608 4,963,308 5,534,438 6,126,076 6,739,630

Accumulated other comprehensive income (loss) (388,000) (499,000) (1,270,200) (1,270,200) (1,270,200) (1,270,200) (1,270,200) (1,270,200)

Employee stock ownership plan (62,800) (53,200) (43,600) (43,600) (43,600) (43,600) (43,600) (43,600)

Total shareowners' equity before treasury 7,764,500 8,253,600 7,781,900 8,364,620 8,983,732 9,637,273 10,311,323 11,007,289

Less: cost of common stock in treasury 1,097,400 1,454,400 1,352,800 852,800 352,800 (147,200) (647,200) (1,147,200)

Stanley Black & Decker, Inc. shareowners' equity 6,667,100 6,799,200 6,429,100 7,511,820 8,630,932 9,784,473 10,958,523 12,154,489

Non-controlling interests 60,000 81,300 82,800 86,940 88,679 94,000 97,760 101,670

Total shareowners' equity 6,727,100 6,880,500 6,511,900 7,598,760 8,719,611 9,878,472 11,056,283 12,256,159


Cash Flow Statement

Fiscal Years Ending Dec. 31 2012 2013 2014

Operating activitiesNet earnings attributable to common shareowners 883,800 490,300 760,900

Depreciation & amortization 237,900 238,000 263,400

Amortization of intangibles 207,400 203,300 186,400

Inventory step-up amortization 6,300 15,400 -

Pre-tax loss (gain) on sale of businesses (384,700) (14,000) 6,300

Loss on debt extinguishment 45,500 20,600 (100)

Asset impairments 10,800 40,900 63,100

Stock-based compensation expense 89,700 66,400 57,100

Provision for doubtful accounts 11,300 13,700 22,100

Deferred tax benefit - (135,700) 42,400

Income tax settlements (48,600) 900 (5,300)

Debt-fair value amortization (18,300) (5,100) (1,100)

Other non-cash items (28,500) 2,800 12,500

Accounts receivable (55,200) 11,300 81,600

Inventories 11,400 (101,900) (175,900)

Accounts payable 109,100 105,000 71,700

Deferred revenue (17,600) (1,100) 12,800

Other current assets (151,700) 13,500 25,800

Long-term receivables (15,200) (11,800) (13,200)

Other long-term assets (145,500) 29,100 39,200

Accrued expenses 24,200 (156,000) 59,700

Defined benefit liabilities (107,000) (110,200) (155,000)

Other long-term liabilities 301,100 152,600 (58,500)

Net cash flows from operating activities 966,200 868,000 1,295,900

Investing activities

Capital expenditures (386,000) (365,600) (291,000)

Proceeds from sales of assets 9,600 4,000 15,400

Business acquisitions, net of cash acquired (707,300) (933,900) (3,200)

(Payments) proceeds from sales of businesses, net of cash sold 1,260,600 93,500 (3,900)

Proceeds (payments) for net investment hedge settlements 5,800 3,600 (61,400)

Other investing activities - - (38,100)

Net cash flows from investing activities 182,700 (1,198,400) (382,200)

Financing activities

Payments on long-term debt (1,422,300) (302,200) (46,600)

Proceeds from debt issuance 1,523,500 726,700 -

Net proceeds (repayments) on short-term borrowings (19,000) 388,700 (391,000)

Stock purchase contract fees (3,200) (3,200) (16,400)

Purchase of common stock for treasury (1,073,900) (39,200) (28,200)

Cash settlement on forward stock purchase contract - 18,800 -

Payment on forward share purchase contract - (350,000) -

Net premium paid for equity option (29,500) (83,200) -

Premium paid on debt extinguishment (91,000) (42,800) -

Termination of interest rate swaps 58,200 - (33,400)

Termination of forward starting interest rate swaps (102,600) - -

Proceeds from issuances of common stock 126,400 154,600 71,300

Cash dividends on common stock (304,000) (312,700) (321,300)

Other financing activities - - (600)

Net cash flows from financing activities (1,337,400) 155,500 (766,200)

Effect of exchange rate changes on cash (2,400) (44,900) (147,100)

Increase (decrease) in cash & cash equivalents (190,900) (219,800) 400

Cash & cash equivalents, beginning of year 906,900 716,000 496,200 Cash & cash equivalents, end of year 716,000 496,200 496,600

Stanley Black & Decker, Inc.Restated Cash Flow Statement

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Operating activitiesNet income (loss) 901,718 967,308 1,029,361 1,066,325 1,105,823

Depreciation & amortization 228,734 165,856 118,949 124,978 108,882

Change in accounts receivable (192,607) (33,521) (93,797) (59,109) (61,282)

Change in inventories (56,735) (34,156) (95,575) (60,230) (62,444)

Change in prepaid expenses (48,465) (4,829) (13,513) (8,516) (8,829)

Change in assets held for sale (9,377) (820) (2,294) (1,446) (1,499)

Change in other current assets 50,687 (4,896) (13,699) (8,633) (8,950)

Change in deferred income taxes 25,297 25,942 26,603 27,281 27,976

Change in accounts payable (33,880) 32,593 91,201 57,473 59,586

Change in accrued expenses 66,156 27,167 76,018 47,905 49,666

Change in liabilities held for sale (10,270) 277 775 488 506

Change in other assets (39,467) (9,670) (27,058) (17,051) (17,678)

Change in other liabilities 100,238 21,577 60,377 38,049 39,448

Net cash from operating activities 982,031 1,152,829 1,157,348 1,207,515 1,231,206

Investing activities

Capital expenditures (275,397) (197,509) (207,520) (180,794) (166,750)

Change in customer relationships (180,776) (23,615) (66,080) (41,643) (43,174)

Change in trade names 83,430 79,259 75,296 71,531 67,954

Change in other intangible assets 7,210 6,850 6,507 6,182 5,873

Change in post retirement benefits (7,499) (7,424) (7,350) (7,276) (7,204)

Net cash from investing activities (373,033) (142,441) (199,148) (152,000) (143,301)

Financing activities

Proceeds from issuance of long term debt (218,764) 102,071 13,456 75,188 41,212

Proceeds from issuance of short term borrowings 99,336 7,499 2,287 6,400 4,033

Change in current portion of lont term debt 100 (1,500) - 490,000 -

Proceeds from issuance of common stock 82,412 82,412 82,412 82,412 82,412

Repurchase of common stock 500,000 500,000 500,000 500,000 500,000

Change in noncontrolling interests 4,140 1,739 5,321 3,760 3,910

Dividends paid (401,410) (430,608) (458,231) (474,686) (492,270)

Net cash from financing activities 65,813 261,614 145,244 683,073 139,297

Change in cash 674,812 1,272,002 1,103,445 1,738,588 1,227,202

Plus beginning cash 496,600 1,171,412 2,443,413 3,546,858 5,285,446

Cash at end of year 1,171,412 2,443,413 3,546,858 5,285,446 6,512,648

Stanley Black & Decker, Inc.Common Size Income Statement


Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Costs and expenses

Cost of sales 63.65% 64.25% 63.82% 63.50% 63.00% 63.00% 63.00% 63.00%Selling, general & administrative expense 24.62% 24.55% 22.71% 23.00% 23.00% 23.00% 23.00% 23.00%Provision for doubtful accounts 0.11% 0.12% 0.18% 0.14% 0.14% 0.14% 0.14% 0.14%Other expenses (income) - net 2.96% 2.61% 2.11% 2.55% 2.55% 2.55% 2.55% 2.55%Restructuring charges & asset impairments 1.72% 1.60% 0.17% 0.88% 0.88% 0.88% 0.88% 0.88%Gain (loss) on debt extinguishment -0.45% -0.19% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Interest income 0.10% 0.12% 0.12% 0.14% 0.14% 0.13% 0.13% 0.13%Interest expense 1.42% 1.46% 1.56% 1.33% 1.34% 1.28% 1.26% 1.23%Earnings from continuing operations before income taxes 5.18% 5.33% 9.57% 8.73% 9.22% 9.28% 9.30% 9.32%Income taxes on continuing operations 0.77% 0.63% 2.00% 1.79% 1.89% 1.90% 1.91% 1.91%Earnings from continuing operations 4.40% 4.70% 7.56% 6.94% 7.33% 7.38% 7.39% 7.41%Less: net earnings (loss) attributable to non-controlling interests -0.01% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net earnings from continuing operations attributable to common shareowners 4.41% 4.71% 7.56% 6.94% 7.33% 7.38% 7.39% 7.41%Earnings (loss) from discontinued operations before income taxes 4.94% -0.38% -0.92% 0.70% 0.70% 0.70% 0.70% 0.70%Income taxes benefit (expense) on discontinued operations -0.68% 0.13% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07%Net earnings (loss) from discontinued operations 4.26% -0.25% -0.85% 0.76% 0.76% 0.76% 0.76% 0.76%Net earnings (loss) 8.67% 4.46% 6.71% 7.71% 8.10% 8.14% 8.16% 8.18%

Stanley Black & Decker, Inc.Common Size Balance Sheet


AssetsCurrent assetsCash & cash equivalents 7.03% 4.51% 4.38% 10.01% 20.45% 28.06% 40.42% 48.15%

Accounts & notes receivable, net 15.09% 14.84% 12.32% 13.58% 13.58% 13.58% 13.58% 13.58%

Inventories, net 12.92% 13.50% 13.78% 13.84% 13.84% 13.84% 13.84% 13.84%

Prepaid expenses 1.96% 1.55% 1.59% 1.96% 1.96% 1.96% 1.96% 1.96%

Assets held for sale 1.31% 0.09% 0.26% 0.33% 0.33% 0.33% 0.33% 0.33%

Other current assets 1.91% 1.57% 2.49% 1.98% 1.98% 1.98% 1.98% 1.98%

Total current assets 40.22% 36.08% 34.83% 41.70% 52.14% 59.75% 72.12% 79.84%

Property, plant & equipment, gross 26.46% 27.59% 27.17% 28.68% 29.74% 29.76% 30.15% 30.38%

Less: accumulated depreciation & amortization 13.37% 14.09% 14.35% 15.85% 16.91% 16.93% 17.32% 17.55%

Property, plant & equipment, net 13.09% 13.50% 12.82% 12.82% 12.82% 12.82% 12.82% 12.82%

Goodwill 68.90% 68.77% 64.17% 62.17% 60.89% 57.56% 55.64% 53.79%

Customer relationships, net 10.60% 10.86% 8.28% 9.57% 9.57% 9.57% 9.57% 9.57%

Trade names, net 16.50% 15.48% 14.72% 13.55% 12.60% 11.32% 10.39% 9.55%

Other intangible assets, net 1.70% 1.55% 1.27% 1.17% 1.09% 0.98% 0.90% 0.82%

Other assets 4.48% 4.07% 3.70% 3.92% 3.92% 3.92% 3.92% 3.92%

Total assets 155.48% 150.30% 139.78% 144.90% 153.03% 155.92% 165.36% 170.31%

Liabilities

Current liabilities

Short-term borrowings 0.01% 3.57% 0.01% 0.86% 0.91% 0.88% 0.90% 0.90%

Current maturities of long-term debt 0.10% 0.09% 0.05% 0.05% 0.04% 0.04% 3.78% 3.66%

Accounts payable 13.25% 14.32% 13.93% 13.21% 13.21% 13.21% 13.21% 13.21%

Accrued expenses 16.50% 11.24% 10.78% 11.01% 11.01% 11.01% 11.01% 11.01%

Liabilities held for sale 0.30% 0.06% 0.21% 0.11% 0.11% 0.11% 0.11% 0.11%

Total current liabilities 30.16% 29.28% 24.98% 25.24% 25.27% 25.24% 29.00% 28.88%

Long-term debt 34.61% 34.54% 33.86% 30.94% 31.16% 29.56% 29.15% 28.48%

Deferred taxes 9.29% 8.31% 8.76% 8.70% 8.74% 8.47% 8.40% 8.32%

Post-retirement benefits 8.01% 6.76% 6.61% 6.34% 6.15% 5.76% 5.51% 5.27%

Other liabilities 7.40% 8.87% 8.14% 8.74% 8.74% 8.74% 8.74% 8.74%

Total liabilities 89.46% 87.76% 82.35% 79.97% 80.06% 77.77% 80.80% 79.70%

Shareholders' equity

Common stock 48.24% 48.37% 45.59% 44.88% 44.64% 42.85% 42.06% 41.26%

Retained earnings 32.38% 31.68% 34.63% 37.83% 41.54% 43.79% 46.85% 49.83%

Accumulated other comprehensive income (loss) -3.81% -4.54% -11.20% -10.85% -10.63% -10.05% -9.71% -9.39%

Employee stock ownership plan -0.62% -0.48% -0.38% -0.37% -0.36% -0.34% -0.33% -0.32%

Total shareowners' equity before treasury 76.19% 75.02% 68.63% 71.48% 75.18% 76.24% 78.86% 81.38%

Less: cost of common stock in treasury 10.77% 13.22% 11.93% 7.29% 2.95% -1.16% -4.95% -8.48%

Stanley Black & Decker, Inc. shareowners' equity 65.42% 61.80% 56.70% 64.19% 72.23% 77.41% 83.81% 89.86%

Non-controlling interests 0.59% 0.74% 0.73% 0.74% 0.74% 0.74% 0.75% 0.75%

Total shareowners' equity 66.01% 62.54% 57.43% 64.93% 72.97% 78.15% 84.56% 90.61%

Stanley Black & Decker, Inc.Value Driver Estimation


NOPLATEBITARevenue 10,190,500 11,001,200 11,338,600 11,702,461 11,949,281 12,639,930 13,075,165 13,526,403Cost of goods sold 6,485,900 7,068,300 7,235,900 7,431,063 7,528,047 7,963,156 8,237,354 8,521,634General and administrative expense 2,509,100 2,700,900 2,575,000 2,691,566 2,748,335 2,907,184 3,007,288 3,111,073Other expenses (income) - net 301,900 287,400 239,700 298,105 304,392 321,986 333,073 344,567

Implied interest on operating leases 23,825 21,614 19,255 19,917 20,556 20,990 22,203 22,968EBITA 917,425 966,214 1,307,255 1,301,645 1,389,064 1,468,595 1,519,654 1,572,097

Adjusted taxesTaxes (federal, state, and foreign) 126,200 204,500 176,600Marginal tax rate 23.92% 34.86% 16.28% 20.50% 20.50% 20.50% 20.50% 20.50%Total income tax provision 78,900 69,300 227,100 209,441 225,867 240,506 249,179 258,474Tax shield on provision for doubtful accounts 2,703 4,776 3,402 3,451 3,524 3,727 3,856 3,989Tax shield on restructuring 41,883 61,392 3,061 21,189 21,636 22,886 23,674 24,492Tax shield debt extinguishment expense 10,883 7,182 (16) 0 0 0 0 0Tax shield on interest expense 34,492 55,919 28,847 31,991 32,933 33,068 33,769 34,158Tax on interest income (2,416) (4,462) (2,214) (3,326) (3,424) (3,438) (3,511) (3,552)Tax shield on implied operating lease interest 5,699 7,535 3,135 4,083 4,214 4,303 4,552 4,708

Total adjusted taxes 172,145 201,641 263,314 266,828 284,749 301,052 311,519 322,269

Change in deferred taxes 41,900 (32,500) 78,300 25,297 25,942 26,603 27,281 27,976

EBITA 917,425 966,214 1,307,255 1,301,645 1,389,064 1,468,595 1,519,654 1,572,097Less adjusted taxes 172,145 201,641 263,314 266,828 284,749 301,052 311,519 322,269Plus change in deferred taxes 41,900 (32,500) 78,300 25,297 25,942 26,603 27,281 27,976NOPLAT 787,180 732,073 1,122,240 1,060,114 1,130,257 1,194,146 1,235,416 1,277,804

Invested CapitalNet operating working capitalOperating current assetsNormal cash 716,000 496,200 496,600 1,062,845 1,085,262 1,147,988 1,187,517 1,228,500

Receivables 1,538,200 1,633,000 1,396,700 1,589,307 1,622,828 1,716,625 1,775,734 1,837,016Inventory 1,316,600 1,485,200 1,562,700 1,619,435 1,653,591 1,749,166 1,809,396 1,871,840Pre-paid expenses and other current assets 199,600 171,000 180,500 228,965 233,794 247,307 255,823 264,652Other current assets 194,500 173,200 282,800 232,113 237,008 250,707 259,340 268,290Operating current assets 3,964,900 3,958,600 3,919,300 4,732,665 4,832,483 5,111,793 5,287,809 5,470,297

Non interest-bearing current liabilitiesAccounts payable 1,350,100 1,575,900 1,579,200 1,545,320 1,577,913 1,669,114 1,726,587 1,786,173Accrued expenses 1,681,500 1,236,200 1,221,900 1,288,056 1,315,223 1,391,240 1,439,145 1,488,812Non interest-bearing current liabilities 3,031,600 2,812,100 2,801,100 2,833,376 2,893,136 3,060,354 3,165,733 3,274,985

Net property, plant, and equipment 1,333,700 1,485,300 1,454,100 1,500,763 1,532,416 1,620,987 1,676,803 1,734,671

Net other operating assetsCustomer relationships 1,079,800 1,194,200 938,900 1,119,676 1,143,292 1,209,372 1,251,015 1,294,189Trade names 1,681,700 1,703,300 1,668,600 1,585,170 1,505,912 1,430,616 1,359,085 1,291,131Other intangible assets 173,100 170,100 144,200 136,990 130,141 123,633 117,452 111,579Other assets 456,300 448,200 419,000 458,467 468,136 495,194 512,245 529,923PV of operating leases 414,342 375,896 334,862 346,388 357,504 365,044 386,143 399,439Net other operating assets 3,805,242 3,891,696 3,505,562 3,646,691 3,604,984 3,623,859 3,625,940 3,626,261

Net other operating liabilitiesOther liabilities 753,800 975,600 922,800 1,023,038 1,044,616 1,104,993 1,143,041 1,182,489 Net other operating liabilities 753,800 975,600 922,800 1,023,038 1,044,616 1,104,993 1,143,041 1,182,489

Invested capital

Net operating working capital 933,300 1,146,500 1,118,200 1,899,289 1,939,348 2,051,439 2,122,077 2,195,312Plus net property, plant, and equipment 1,333,700 1,485,300 1,454,100 1,500,763 1,532,416 1,620,987 1,676,803 1,734,671Plus net other operating assets 3,805,242 3,891,696 3,505,562 3,646,691 3,604,984 3,623,859 3,625,940 3,626,261Less net other operating liabilities 753,800 975,600 922,800 1,023,038 1,044,616 1,104,993 1,143,041 1,182,489Invested capital 5,318,442 5,547,896 5,155,062 6,023,704 6,032,132 6,191,292 6,281,778 6,373,755

Return on invested capitalNOPLAT 787,180 732,073 1,122,240 1,060,114 1,130,257 1,194,146 1,235,416 1,277,804/Beginning invested capital 5,870,551 5,318,442 5,547,896 5,155,062 6,023,704 6,032,132 6,191,292 6,281,778Return on invested capital 13.41% 13.76% 20.23% 20.56% 18.76% 19.80% 19.95% 20.34%

Free cash flowsNOPLAT 787,180 732,073 1,122,240 1,060,114 1,130,257 1,194,146 1,235,416 1,277,804

Less ending invested capital 5,318,442 5,547,896 5,155,062 6,023,704 6,032,132 6,191,292 6,281,778 6,373,755Plus beginning invested capital 5,870,551 5,318,442 5,547,896 5,155,062 6,023,704 6,032,132 6,191,292 6,281,778Free cash flows 1,339,289 502,619 1,515,075 191,471 1,121,830 1,034,985 1,144,930 1,185,827

Economic profitBeginning invested capital 5,870,551 5,318,442 5,547,896 5,155,062 6,023,704 6,032,132 6,191,292 6,281,778ROIC 13.41% 13.76% 20.23% 20.56% 18.76% 19.80% 19.95% 20.34%WACC 6.98% 6.98% 6.98% 6.98% 6.98% 6.98% 6.98% 6.98%Economic profit 377,705 361,108 735,270 700,545 710,099 773,400 803,569 839,646


Weighted Average Cost of Capital (WACC) Estimation

Tax rate 20.50%

Cost of equity 7.58%

Risk free rate 2.87% 30-Year Treasury Bond

+

Beta 0.97 Calculated based on data from Bloomberg (see inputs)

*Market risk premium 4.85% Henry Fund consensus estimate


WACC


*Equity/firm 80.00% Market value of equity: $16,771,871

+

Cost of debt 5.75% SWK bond with maturity of 12/15/2053

*(1-tax rate) 79.50%

*Debt/firm 20.00% Book value of debt: $3,847,300 PV of Operating Leases: $346,388

WACC 6.98%

Stanley Black & Decker, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.00% CV ROIC 20.34% WACC 6.98% Cost of Equity 7.58%


DCF ModelPeriod 1 2 3 4 4

Free cash flow 191,471 1,121,830 1,034,985 1,144,930

CV 27,404,573

PV of free cash flows 178,986 980,306 845,447 874,276

PV of CV 20,926,314

Operations value 23,805,330

Non-operating assets:Excess cash 108,566 Assets held for sale 38,877Value of non-operating assets 147,443

Non-operating liabilities:PV of operating leases 346,388PV of employee stock options 305,655Short-term borrowings 100,936Current portions of long term debt 6,000Liabilities held for sale 13,130Long-term debt 3,621,036Post retirement benefits 742,401Noncontrolling Interests 86,940Value of non-operating liabilities 5,222,485

Equity value 18,730,289Shares outstanding 152,666 Price at YE FY2014 122.69$

Price today 128.06$

EP ModelPeriod 1 2 3 4 4Economic profit 700,545 710,099 773,400 803,569Continuing value 21,122,794PV of economic profit 654,867 620,518 631,767 613,611PV of continuing value 16,129,507Initial invested capital 5,155,062

Operations value 23,805,330

Non-operating assets:Excess cash 108,566 Assets held for sale 38,877Value of non-operating assets 147,443

Non-operating liabilities:PV of operating leases 346,388PV of employee stock options 305,655Short-term borrowings 100,936Current portions of long term debt 6,000Liabilities held for sale 13,130Long-term debt 3,621,036Post retirement benefits 742,401Noncontrolling Interests 86,940Value of non-operating liabilities 5,222,485

Equity value 18,730,289Shares outstanding 152,666 Price at YE FY2014 122.69$

Price today $ 128.06


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


Period 1 2 3 4 4

EPS $5.91 $6.47 $7.01 $7.39 $7.79

Key Assumptions

CV growth 3.00%

CV ROE 9.02%

Cost of Equity 7.58%

Payout ratio 44.52%

Future Cash Flows

EPS $7.79

Implied P/E Multiple 14.59

Future Stock Price $113.57

Growth 3.21% 2.11% 5.78% 3.44%

ROE 11.87% 11.09% 10.42% 9.64%

Dividends Per Share $4.31 $5.24 $3.12 $4.75

Discounted Cash Flows $4.01 $4.53 $2.51 $3.55 $84.80

Intrinsic Value $99.39

Price today $105.81

Stanley Black & Decker, Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16

TTC Toro Co $70.67 $3.51 $3.95 20.1 17.9 9.6 2.10 1.86

SNA Snap-on Incorporated $162.15 $8.03 $9.10 20.2 17.8 9.6 2.10 1.86

669-HK Techtronic Industries 30.55HK$ HK$ 1.81 HK$ 2.16 16.9 14.1 13.2 1.28 1.07 6586-JP Makita Corporation 6,860.00¥ ¥ 385.86 ¥ 408.05 17.8 16.8 4.8 3.70 3.50

Average 18.7 16.7 2.3 2.1

SWK Stanley Black & Decker, Inc. $107.45 $5.91 $6.47 18.2 16.6 7.8 2.3 2.1

Implied Value:

Relative P/E (EPS15) $ 110.72

Relative P/E (EPS16) 107.78$

PEG Ratio (EPS15) 105.27$

PEG Ratio (EPS16) 104.10$

Stanley Black & Decker, Inc.Key Management Ratios


Liquidity RatiosCurrent (Current Assets/Current Liabilities) 1.76 1.32 1.33 1.23 1.39 1.65 2.06 2.37

Quick (Current Assets-Inv)/Current Liabilities 0.15 0.53 0.56 0.67 0.67 0.60 0.30 0.06Operating Cash Flow (Operating Cash Flow/Current Liabilities) 0.27 0.31 0.31 0.33 0.73 0.69 0.70 0.69

Activity or Asset-Management RatiosReceivables turnover (sales/average receivables) 6.59 6.94 7.48 7.84 7.44 7.57 7.49 7.49Inventory turnover ratio (COGS/average inventory) 4.71 5.05 4.75 4.67 4.60 4.68 4.63 4.63Asset turnover ratio (sales/total assets) 0.64 0.67 0.72 0.69 0.65 0.64 0.60 0.59

Financial Leverage RatiosDebt to equity ratio (total liabilities/shareholder equity) 1.36 1.40 1.43 1.23 1.10 1.00 0.96 0.88

Equity ratio (shareholder equity/total assets) 0.42 0.42 0.41 0.45 0.48 0.50 0.51 0.53Leverage (assets/equity) 2.36 2.40 2.43 2.23 2.10 2.00 1.96 1.88

Profitability Ratios

Return on assets (net income/total assets) 5.58% 2.97% 4.80% 5.32% 5.29% 5.22% 4.93% 4.80%Return on equity (net income/shareholders equity) 13.14% 7.13% 11.68% 11.87% 11.09% 10.42% 9.64% 9.02%Profit margin (net income/sales) 8.67% 4.46% 6.71% 7.71% 8.10% 8.14% 8.16% 8.18%Gross profit margin (gross profit/revenue) 36.35% 35.75% 36.18% 36.50% 37.00% 37.00% 37.00% 37.00%


Current price: $107.45

WACC

$128.06 5.98% 6.48% 6.98% 7.48% 7.98%

57.50% 187.38 155.76 132.10 113.72 99.03

60.50% 185.71 153.90 130.10 111.61 96.84

63.50% 184.01 152.01 128.06 109.47 94.62

66.50% 182.60 150.42 126.33 107.63 92.70

69.50% 181.96 149.59 125.37 106.57 91.55

Beta

$128.06 0.77 0.87 0.97 1.07 1.17

19.00% 169.47 147.83 130.33 116.02 103.98

21.00% 168.32 146.69 129.20 114.89 102.85

23.00% 167.18 145.55 128.06 113.76 101.72

25.00% 166.04 144.41 126.93 112.63 100.59

27.00% 164.90 143.27 125.79 111.49 99.46

CV ROIC

$128.06 16.34% 18.34% 20.34% 22.34% 24.24%

27.00% 121.00 124.33 127.01 129.20 130.95

28.00% 121.50 124.85 127.54 129.74 131.50

29.00% 122.00 125.36 128.06 130.28 132.05

30.00% 122.50 125.88 128.59 130.82 132.59

31.00% 123.00 126.39 129.12 131.36 133.14

CV Growth

$128.06 1.00% 2.00% 3.00% 4.00% 5.00%

-11.00% 90.28 104.84 126.74 163.35 237.03

-9.00% 90.71 105.37 127.40 164.24 238.39

-7.00% 91.15 105.90 128.06 165.13 239.74

-5.00% 91.59 106.42 128.73 166.03 241.09

-3.00% 92.02 106.95 129.39 166.92 242.44

Cost of debt

$128.06 3.75% 4.75% 5.75% 6.75% 7.75%

-52.00% 139.51 132.61 126.26 120.41 115.00

-48.00% 140.52 133.56 127.16 121.27 115.81

-44.00% 141.52 134.51 128.06 122.12 116.63

-40.00% 142.53 135.46 128.96 122.98 117.44

-36.00% 143.53 136.41 129.86 123.83 118.25

Cost of sales % of

sales (2015)

SG&A % of sales

(2015)

CDIY growth (2015)

Industrial growth

(2015)

Security growth

(2015)

Documents

[email protected]] Inc. (SWK) November 16, 2015tippie.biz.uiowa.edu/henry/reports15/SWK_fa15.pdf · 2015-11-16 · Stanley Black & Decker, Inc. (SWK) November 16, 2015 Industrials