Why Stanley Black & Decker Stock Popped Today

Key Points

• Wolfe Research analyst Nigel Coe upgraded Stanley stock this morning.

• After two years of declining sales, Coe thinks the stock looks "troughy."

• Stanley stock offers investors a cheap valuation and a strong dividend yield.

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Shares of Stanley Black & Decker (NYSE: SWK) stock closed 3.4% higher on Tuesday after Wolfe Research analyst Nigel Coe removed his "underperform" (i.e., sell) rating from the stock, and upgraded shares of the toolmaker stock to peer perform (i.e., neutral).

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Why Wolfe likes, not loves, Stanley Black & Decker

This wasn't exactly a full-throated howl of endorsement. Wolfe's analyst didn't feel sufficiently confident in his upgrade to hang a specific price target on the stock, for example. Still, in a note covered today on The Fly, Coe mused that markets for Stanley's products look "troughy."

That's not really a word, but it should be. What Coe means by it is that demand for tools is probably near bottom now (i.e., at a trough), and should rebound, especially if the Federal Reserve ever gets around to cutting interest rates (as he thinks will happen).

Is it time to buy Stanley stock?

Stanley's currently working its way through its third straight year of declining sales, so Coe's at the very least directionally right about where sales are trending -- whether they've reached their absolute bottom, or "trough."

For what it's worth, most analysts agree the company will grow earnings this year, and keep growing for at least another couple of years. Long term growth rate projections are a respectable 11%, annualized. That may not sound like much, given the stock is trading for nearly 30 times earnings today. However, Stanley's free cash flow is very strong -- $765 million over the past year, or twice reported generally accepted accounting principles (GAAP) earnings.

At a 14x FCF valuation, and paying a very nice 4.7% dividend yield, Stanley looks plenty cheap to me. Whether or not it's at its absolute trough price today, I think the stock should perform well from here.

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Rich Smith 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.