The industrial sector, from a big picture perspective, sells products to other companies. There are many iconic names in the space such as Stanley Black & Decker (SWK -0.04%) and Rockwell Automation (YEAR 1.15%), whose shares have been falling lately. There are good reasons to be concerned, but this cyclical industry often provides the best investment opportunities when Wall Street is in a gloomy mood. That’s why you might want to hold your nose and buy these two stocks if you have the cash.
1. Tools are a necessity
Shares of Stanley Black & Decker are down about 35% so far in 2022, much worse than S&P 500 Indexis approximately a 16% decline. Vanguard Industrials ETF, a rough proxy for the industrial sector, has declined by about 15%. Stanley Black & Decker’s core business is the manufacture of tools and fasteners, both of which are products that customers need to do their jobs. Although demand will ebb and flow with economic activity, it is highly unlikely that it will fall to zero.
In the first quarter, Stanley cut its full-year 2022 adjusted earnings range to $9.50 to $10.50 per share, down from a range of $12.00 to $12.50. It followed in the second quarter by again cutting guidance, this time to a range of $5.00 to $6.00 per share. Investors are understandably worried, noting that supply chain issues and inflationary cost pressures are big issues. In the second half of the second quarter, sales also began to slow, reflecting the industrial company’s sensitivity to economic cycles. However, the company has a market leading position in tools with brands such as Stanley, Black & Decker, DeWalt and MAC Tools. The business is stable, even if there is weakness in shorter periods.
Right now, Stanley is doing the things you’d expect, including raising prices and trying to shore up its supply chain. It is also working to streamline its business by selling off non-core divisions, including security and door opening systems, and agreeing to divest its oil and gas services business. This will free up cash that can be used for other purposes, such as debt reduction and share buybacks, and allow management to focus on its remaining operations. Things may be tough right now, but when the tough times eventually turn to the good, Stanley Black & Decker will likely come out the other side a stronger company.
2. More technology, not less
Shares of Rockwell Automation are down about 35% this year. As its name suggests, it provides automation equipment and services to companies looking to reduce costs and optimize operations. It’s not something that’s likely to fall out of favor for a very long time, with more business automation far more likely than a global shift back to human labour.
When Rockwell reported its fiscal second-quarter earnings, it cut full-year organic sales guidance to a range of 10% to 14%, down from 14% to 17%. It lowered the top end again when it reported fiscal third-quarter results, cutting its guidance range to 10% to 12%. Adjusted earnings guidance fell to a range of $9.20 to $9.80 from $10.50 to $11.10 after the second quarter, with the range narrowing to $9.30 to $9.70 with the release of the company’s fiscal third quarter results. One big problem for management is getting enough parts to meet demand. In fact, the company said the backlog is at record levels.
Business is not in trouble, although in the near future it may not be as good as expected. And when you step back, it’s hard to complain about 10% organic growth. If you’re a long-term investor, the current pullback could be an opportunity to join a company with still solid demand.
Nothing rises or falls in a straight line, so long-term investors need to step back and consider what’s happening today versus what the future may hold. Stanley and Rockwell have strong positions in the industry and the products they sell will not go out of style. Yes, their industry business is cyclical, but that just means that pullbacks can offer good buying opportunities as these industry leaders continue to grow their businesses over time. With stocks being weak, now would be a good time to take a deep dive.