Stanley Black & Decker's (SWK) - Get Stanley Black & Decker, Inc. Report sale of its electronic security business, its thinnest-margin business, to Sweden's Securitas for $3.2 billion solidifies the iconic toolmaker's core, according to a bullish Wells Fargo note.
The investment firm rates the New Britain, Conn., company overweight with a $219 price target, representing a nearly 17 times multiple to expected earnings.
The target indicates 18% upside from the company's closing price on Tuesday. The stock was up 4.2% in 2021 through Tuesday's close.
Shares of Stanley Black & Decker at last check jumped 4.6% to $194.62.
"This move allows the company to dedicate more attention to the core businesses while taking advantage of a healthy valuation environment," Wells Fargo analyst Joseph O'Dea said.
The firm expects the sale to help 2022 earnings slightly or be neutral. But the company's operating margins stand to benefit as the security business was the Stanley Black & Decker segment with the thinnest profit margins.
Revenue from the business is forecast at about $1.7 billion for 2021 with an adjusted Ebitda margin in the low double-digits percent.
The company says it will use the proceeds from the sale to fund in part a nearly $4 billion share buyback program. That plan is slated to be completed in 2022.
"We view SWK's about 30% relative valuation discount to EEMI and [the S&P 500] as attractive," O'Dea said.
"[This] outweighs concerns of a potential slowdown in tools and storage demand. SWK has flexibility to further optimize its portfolio in a meaningful way via a combination of divestitures and mergers and acquisitions."