Stanley Black & Decker reported mixed quarterly results before Tuesday’s opening bell, and the stock got whacked. While the numbers were disappointing, the company’s turnaround continues to plan. Revenue fell 5% year over year to $3.75 billion in the third quarter, shy of the $3.8 billion expected by analysts, according to estimates compiled by LSEG. Organically, sales were down 2% year-over-year. Adjusted earnings per share rose 16% to $1.22, topping LSEG’s estimate of $1.05. SWK YTD mountain Stanley Black & Decker YTD Shares of Stanley Black & Decker consolidated around an 8% decline after the release. The stock had been down more than 13%, below $90 at the lows of the session. We upgraded Stanley Black & Decker on Tuesday morning back to our buy-equivalent 1 rating on the belief the stock reaction to the print was overdone. Bottom Line While sales missed in both key operating segments, Tools & Outdoor and Industrial, we’re more focused on how profitability in each still managed to outpace expectations. Free cash flow came up a bit short but was still more than adequate to support the dividend, continue working down debt, and invest in further growth. CEO Donald Allan said on the post-earnings call, “We have deployed new investments to stimulate sustainable growth with the primary goal of reinvigorating share gain to achieve organic growth of 2 to 3 times the market over the long term.” Sales results are a product of end market demand, and we know that’s going to be under pressure until the housing market starts to turn. For that to happen, we need to see interest rates – and more specifically mortgage rates – come down to spur demand for both new home buying and renovation projects. The power tools and hand tools needed for homebuilding and fixing up existing homes are made by Stanley Black & Decker whose brands include those namesakes as well as Dewalt for pros and Craftsman for consumers. The 10-year Treasury yield , which influences mortgage rates, has been rising despite the Federal Reserve’s jumbo first rate cut of its easing cycle last month and promises of more reductions to come. 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 elevated mortgage 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: July 2, 2024 Initiation: June 14, 2023 In the meantime, management is making progress overhauling the company and making it more efficient. When rates do start to drop and investors gain conviction that they are going to stay down, this stock will prove to be a coiled spring thanks to the team’s strong execution in the recent quarter on the things they can control. To this point, both gross and operating margins expanded year-over-year and were better than expected. The gross margin expansion was largely attributable to supply chain improvements. “We are optimistic that the markets will turn in our favor in the future as interest rate cuts in many geographies likely will prove to be an initial catalyst,” Allan said on the call. “There will be a lag between lower rates and the flow through to demand for our categories, and we expect choppy markets will extend into the first half of next year until interest rate reductions have a greater effect and the U.S. election result is known and settled. As a short-cycle business, we will plan our production and inventory thoughtfully to ensure we are ready for stronger demand in the future, which could be as early as the second half of 2025.” We think the market took this to mean a pushout of when demand will improve. The nature of short-cycle business is a quicker turnaround time from manufacturing to product delivery. Management remains on track to achieve its target of $2 billion in pre-tax, run-rate cost savings by the end of 2025. The company cut costs by another $105 million in the third quarter for a total-to-date savings of $1.4 billion. The team is also making good progress toward its 35%+ long-term gross margin target, with 30.5% in Q3 tracking well above the 29.1% gross margin in the first half of the year. Management expects further gross margin expansion in the current (fourth) quarter. Commentary Sales at Tools & Outdoor fell 3% year-over-year, down 2% organic, as a 1% benefit from price actions were more than offset by a 1% currency headwind and a 3% decline in sales volume. Growth in Dewalt, which was up for the sixth consecutive quarter, was more than offset by the weak consumer and DIY backdrop. Geographically, North American sales were down 4% organic, while Europe was up 1% organic, and the rest of the world was up 6% organic. Adjusted segment margin expanded 180 basis points versus the year-ago period, thanks largely to supply chain efficiency gains. We could have seen in even more expansion except that management opted, rightly in our view, to invest in further growth initiatives. Industrial segment sales — largely comprising of fasteners made for end markets such as automotive and aerospace — fell roughly 18%. However, volume was only down 2% while prices were up 1% versus the year ago period — so organically, revenue was only down 1% year over year. The divestiture of the company’s Infrastructure business accounted for 17 percentage points of decline. Guidance Management updated its outlook for the remainder of the year, tightening its full-year earnings outlook, now targeting an adjusted EPS range of $3.90 to $4.30 versus a wider range of $3.70 to $4.50 previously. The midpoint, however, remains the same at $4.10, which is short versus expectations of $4.20. The team is expecting a bit less depreciation and lower capital expenditures now versus the guidance provided with the second quarter release, though that will be partially offset by an expectation for higher-than-expected inventory levels at year-end. The midpoint reiterated and not raised on the back of a Q3 earnings beat is likely putting some pressure on the stock because it means that management isn’t passing the beat through to guidance. The implication is that the implied current (fourth) quarter guidance is a bit light versus expectations. Full-year free cash flow guidance was reaffirmed at $650 million to $850 million, which at the $750 million midpoint comes up short versus the $818 million estimate. (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 reported mixed quarterly results before Tuesday’s opening bell, and the stock got whacked. While the numbers were disappointing, the company’s turnaround continues to plan.