Stanley Works

(SWK) - Get Report

closed at $54.02 a share Tuesday, reaching a new eight-year high. Even so, the company is trading at just 15.5 times expected full-year earnings of $3.48 a share, which is below the current valuation of the benchmark

S&P 500

.

With that in mind, I'm here to answer the question: Should I do it? Is there still money to be made in Stanley Works?

Stanley Works is the largest U.S. toolmaker, generating about 75% of its revenue from brands like Bostitch and Stanley. The other 25% of Stanley Works' business consists of hinges, closet organizers and automatic doors. The stock is a far cry from the $20.84 it bottomed out at two years ago, when the company was missing quarterly expectations left and right and was later formally investigated by the

Securities and Exchange Commission

for "accounting corrections related primarily to expense capitalization and depreciation."

Yet shares of Stanley Works didn't flinch back in January, when the company posted disappointing fourth-quarter results. Stanley Works earned 75 cents a share, shy of the 82-cent consensus analyst estimate, blaming a sharp drop in customer orders at the end of the year.

Stanley is scheduled to post first-quarter results April 25. The consensus analyst estimate is for the company to earn 44 cents a share, down 44% from the prior year, on revenue of $973 million. With 8% full-year earnings growth expected from Stanley in 2006, investors are taking a big leap of faith that the company can make up for this first-quarter decline in the second half of the year. There is also the question of whether customer orders have recovered from the decline experienced in late 2005.

So why pay 15.5 times earnings for Stanley Works, when you can pick up

Black & Decker

(BDK)

? At Tuesday's closing price of $93.05, the stock trades at just 12.6 expected 2006 earnings of $7.35 a share. Both companies are expected to post high single-digit earnings growth this year, but Black & Decker's 13.5% profit compound annual growth rate over the past decade dwarfs Stanley Works' 5.7%.

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.

Stanley's 2.15% dividend yield is 50 basis points higher than what Black & Decker offers. Both companies have a similar amount of debt relative to total capitalization on the balance sheet, but Stanley Works also trades at a premium to Black & Decker on a price/sales and enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA) basis.

Deutsche Bank analyst Nigel Coe, for one, apparently believes that Stanley Works still holds value at current levels. He upgraded the company from hold to buy on April 6, setting a $62 price target. Rather than seeing signs of a potential turnaround in order rates, Coe, in his research note, cited the July acquisition of French toolmaker Facom as contributing to higher future earnings.

Stanley closed this deal in early January, paying 410 million euros ($485 million), and expects earnings accretion of 10 cents a share in 2006. Even so, I must caution investors that integrating any acquisition, especially a foreign one, carries a lot of risk.

So, no, readers shouldn't do it. Stanley Works may be valued at a small discount to the S&P 500, but it still looks expensive relative to its peers. Trading at multiyear highs, I don't believe investors are discounting the company's earnings risk. With that in mind, Stanley Works should be avoided at current levels.

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