Stanley Black & Decker to Restart the M&A Machine

The CEO of Stanley Black & Decker (SWK) - Get Report  said Monday that the company has a pipeline full of potential targets as it looks to expand following a self-imposed, two-year hiatus from dealmaking.

New Britain, Conn.-based Stanley Black & Decker in late 2013 announced a two-year moratorium on mergers and acquisitions to focus on paying down debt and operational improvements after completing more than 100 acquisitions over 15 years. In that span, the company has grown from $2 billion in sales in 2000 to $11 billion today thanks in no small part to acquisitions, including the $4.5 billion acquisition of Black & Decker Corp. by what was then Stanley Works in 2009.

Chairman and CEO John Lundgren, speaking at the Electrical Products Group conference in Florida on Monday, said that Stanley Black & Decker is "back in the M&A business." He envisions the company deploying about half of its cash for acquisitions, with the rest returned to shareholders. Stanley Black & Decker generated nearly $900 million in free cash flow last year.

Stanley is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Cramer and Jack Mohr, director of research, earlier this month downgraded the company's shares as the stock was hovering near the portfolio's newly raised $115 price target, saying that "we view the risk/reward skewed to the downside going forward." Shares of Stanley traded at $113.88 apiece on Monday afternoon.

Lundgren said he sees potential for dealmaking in the company's $7.1 billion-sales tools and storage business, which houses top brands including DeWalt, Stanley, Porter-Cable and Black & Decker. Despite Stanley Black & Decker's No. 1 market share in the tool industry, he said the company has only a 17% global marketshare, with ample room to consolidate globally.

Another area of emphasis for Stanley Black & Decker is its $2 billion industrials business, which makes a range of engineered fasteners as well as some energy infrastructure equipment. The company's traditionally auto-focused fastener business was expanded in 2012 when it bought Infastech Ltd. for $850 million, moving into consumer electronics components.

Lundgren said he would like to expand the fasteners franchise next into aerospace, which would likely require an acquisition.

That's an area that has seen a lot of dealmaking attention of late, including Warren Buffett's Berkshire Hathaway last year buying Precision Castparts for $32.3 billion and Alcoa spending more than $4.5 billion between 2011 and 2015 to roll up aerospace component manufacturers before moving late last year to spin those businesses off as an independent entity.

There are also a lot of private-equity firms active in consolidating the aerospace supply chain, creating mid-sized vendors that could be of interest to a larger buyer like Stanley Black & Decker.

Lundgren also said the company remains on track to decide on the fate of its $2.1 billion-sales security operation in the second half of 2016. The executive last year said that Stanley would "reevaluate" security after the unit streamlines operations to see if it can meet the parent's profitability expectations.

"It is a business we like strategically," Lundgren said, noting its counter-cyclical nature and strong ties to a growing construction market. The executive said that if the security business is separated it would almost certainly be done as a tax-free spinoff to shareholders and not a sale due to a sale's tax implications, and also said that certain security units could be divested even if the overall operation is kept in-house.