One of these companies is not like the others, admittedly. But I’m truly a bit stunned at how little attention has been paid to Q2 earnings from Stanley Black & Decker.
Revenue did increase 16% year-over-year. But per the 10-Q (p.44), organic growth was negative 8%. Volume fell 13%.
Adjusted EPS was $1.77 vs $2.81 the year before. Stanley Black & Decker slashed full-year guidance to $5.00-$6.00 from $9.50 to $10.50.
There are leverage and cost inflation factors at play, certainly. But this is one of the worst quarters you’ll ever see. And it seems like a screaming alarm for the home improvement industry. Each of Lowe’s (LOW) and Home Depot (HD) accounted for 15% of SBD revenue in 2021.
Here’s how the market has reacted:
source: YCharts
Both home improvement giants have been sold off this year, admittedly, with HD down 26% year-to-date and LOW 24%. But both came into the year with almost absurd valuations: as we’ve noted before, HD traded at 26x 2021 EPS. Again, we see historically high multiples being applied to historically strong results — a hugely dangerous combination.
HD still trades at 18.6x this year’s consensus. It’s fair to ask why, exactly, investors are modeling in long-term growth from the current base, and why, exactly, those investors are treating HD as if it’s not a) cyclical and b) a retailer of goods.
From here, Stanley Black & Decker results seem like a canary in the coal mine. And no one is listening.
I’d be very cautious about owning either stock into Q2 earnings later this month. And I’d take a look at the options market. Straddle pricing for HD suggests a move from here through Aug. 19 (the Friday after earnings) of barely 5%. Modestly out-of-the-money puts look intriguing.
There’s absolutely a scenario where the story surrounding home improvement stocks changes dramatically two weeks from now. If that scenario plays out, the Stanley Black & Decker report won’t look like an outlier, but a harbinger.
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