Here's Why Stanley Black & Decker Stock Slumped in October, and Why It Could Be a Buying Opportunity

Shares in tools and industrial products company Stanley Black & Decker (NYSE: SWK) slumped by 15.6% in October, according to data from S&P Global Market Intelligence. You have to look no further than the company's third-quarter 2024 earnings report for the reason for the fall. In a nutshell, the company took a step back in its recovery path, and management's commentary indicated that it would take a bit longer than many had anticipated for the company to return margin and inventory to previous levels.

The investment case for Stanley Black & Decker stock

The case for buying the stock rests on the idea that the company will reduce its elevated inventory levels by generating sales growth. At the same time, an ongoing cost-reduction plan will cut annual costs by $2 billion by 2025.

As such, the toolmaker intends to return its gross profit margin to at least 35% and significantly improve its earnings and cash flow.

SWK Gross Profit Margin (Quarterly) data by YCharts

What went wrong in the third quarter

Stanley's end markets were soft in the third quarter, with weakness in interest-rate sectors such as consumer DIY tools and the automotive industry more than offsetting strength in aerospace and a return to growth in industrial fasteners. Ultimately, Stanley's sales declined 5% in the quarter on a reported year-over-year basis and 2% organically. Adjusted gross margin was 30.5% in the quarter, compared with 27.6% in the same quarter of 2023. (The figures in the preceding chart are reported gross margin.)

Image source: Getty Images.

While the progress on gross margin is positive, the company will take a while to reach its 35% target. That sense of delayed recovery is evident in the disappointing sales and in CEO Don Allan's commentary on the earnings call: "We expect choppy markets will extend into the front half of next year until interest rate reductions have a greater effect."

In addition, disappointing sales showed the company reporting an uptick in its quarterly inventories-to-sales ratio.

Fundamental Chart data by YCharts

Relatively bloated inventory levels might induce the company to reduce, or at least hold back, pricing increases to reduce inventory. That's not good news for margin.

A stock to buy?

That said, management also confirmed that the cost-cutting measures are on track, and the weakness is in interest rate-sensitive sectors. As such, a lower interest-rate environment is likely to improve its end markets through 2025, and the company's margin and inventory-to-sales ratio should also improve. Trading at less than 20 times the midpoint of management's free cash flow guidance for 2024, the stock looks like a decent value.

Should you invest $1,000 in Stanley Black & Decker right now?

Before you buy stock in Stanley Black & Decker, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Stanley Black & Decker wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $829,746!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of October 28, 2024

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.