Barron's hearts Stanley Works

 - 
04/27/2009
Barron's has upgraded Stanley Works stock from neutral to outperform, using the performance of the security portion of the business as a large part of its reasoning. Here are some of the laudatory remarks:
First-quarter results highlight solid execution and we are incrementally positive on Stanley Works' ability to weather the macroeconomic downturn via structural improvement initiatives. Growth and high returns in the security business, early-cycle exposure at CDIY [construction & do-it-yourself], and solid free-cash-flow profile drive our constructive investment thesis.
Basically, part of Stanley's push to get into security was their distaste for construction and do-it-yourself, which is driven by the big box stores who drive margins absurdly low. This is nice validation for that plan.
Restructuring actions implemented are expected to yield $320 million in savings annually with a substantial majority considered permanent. The company's $2.00-$2.50 EPS forecast incorporates approximately $2 per share in benefits from restructuring actions, helping offset significant volume pressure (a $2.40-$2.90 impact). We believe portfolio is well positioned to generate operating margins in a 15% range once macroeconomic headwinds stabilize with resulting earnings power approaching $5 per share. The company continues to invest in growth initiatives during the downturn: $15 million of restructuring savings is being reinvested into various initiatives, such as expanding security sales force and promoting the brand through sponsorships.
Generally, "restructuring" means layoffs, as far as I can tell, but it doesn't sound like those layoffs will come in the integration side of the business. In fact, they'll be hiring more sales people (and this is probably related to the extra spend on training Stanley's been making, too).
The security business is holding up. Sales declined 4% organically in the first quarter. Management believes that organic declines could be limited to the mid-single-digit range as recurring revenues provide approximately 30% of the segment's sales. We believe Stanley Works' 4% organic sales decline could be indicative of market share gains as other industry competitors appear to have reported slightly steeper declines in comparable end markets. We are forecasting Security sales to decline 2% organically in 2009. Ongoing acquisition integration provides further operating margin upside to the business as well. Material acquisition activity appears unlikely with Stanley Works focused on deleveraging.
Consider that the 30 percent that's recurring is 30 percent of the overall security business, which includes product sales. That's got to mean that the recurring revenue is as much as 50 percent or more of the integration piece. I'm not sure I agree with prediction that Stanley will step off the gas with acquisitions, though. Maybe "material acquisition" means big acquisitions, and more Sonitrol franchises are too small to matter much, but I'm fairly certain you'll hear about more Stanley buys in 2009.