NEW YORK ( TheStreet) -- As the U.S. housing recovery steadily became more noticeable in the past couple of years, investors in leading tool company Stanley Black & Decker ( SWK) have grown increasingly frustrated at the company's underperformance. And it's been for good reason.
Unlike, say, home improvement retailers Lowe's (LOW) and Home Depot (HD), or even lumber manufacturer Louisiana Pacific (LPX), which have all found shelter in housing, Stanley has wallowed in low margins and an over-leveraged balance sheet.
Making matters worse was commercial construction activity also taking a turn for the worse. It's true Stanley hasn't been alone in its suffering. Rivals like Snap-On (SNA) have also taken their lumps. Even so, unlike Snap-On or a large industrial tool company like Illinois Tool Works (ITW), Stanley's management shot themselves in the foot by selling off some housing-related assets. And in the October quarter, these moves came home to roost.
Stanley stock plummeted as much as 16%. It was not because the October quarter was bad; rather, because investors realized that Stanley was not as closely tied to the housing recovery as initially believed (at least not to the extent of a company like Mohawk Industries (MHK)).
In October, upon issuing guidance for the fourth-quarter that is due out Friday, management cited projected weak organic growth on (among other things) the government shutdown. By revealing margin compression within the Security segment due to weakening emerging markets, the company spooked investors even more. And it didn't stop there.
Stanley cut its fiscal year 2013 earnings-per-share estimates (excluding charges) by almost 12%, and management trimmed $200 million, or 20%, from prior free cash flow projections. It was a rude awakening for investors. Given these developments, I disagree with analysts calling the 16% drop in share price "an overreaction." It was more than justified. But I'm not buying investors' claims that they were somehow "misled" by the company.
The fact that Stanley had not participated in the Street's "house party" was a sign that analysts already knew the company was not adequately exposed to housing. And Stanley's management had made this clear by its recent moves. Management has been open about emerging markets being an important driver of long-term growth. Investors chose to ignore the nuts and bolts.
The problem has been the execution. For instance, I don't believe the company has invested enough in areas like manufacturing and distribution to leverage Stanley's overseas brand recognition. The October quarter also revealed that Stanley didn't place a strong priority in areas like marketing to the extent that demonstrates it is serious about securing those markets. (And this explains management's weak international growth projections.)
Suffice it to say, this company is missing some tools. Or there's a screw loose somewhere. On Friday, management will need to find them during the earnings call. The Street will be looking for $1.30 in earnings-per-share on revenue of $2.87 billion, which would represent 7.4% year-over-year revenue growth.
Given the ongoing struggles in the security segment, where the company attributed roughly half of its full-year guidance decline, these numbers still seem optimistic to me. And while management has been working costs lower and bringing synergies to Stanley's $850 million acquisition of Infastech two years ago, I don't believe these will be enough to move the shares higher, not when overall organic growth is projected to come in at just 4%.
I believe it will take several more quarters, if not an entire fiscal year for value to be extracted from the Infastech deal. Even then, there remains the question about Stanley's ability to execute and/or invest to secure a solid position in emerging markets. This must come at the same time management appears to be in a mode of cost reduction.
All of that said, stock price performance comes down to how strongly investors believe in this management team and whether they have the right tools to get this company back to growing free cash flow and margins. While these shares are not expensive now, I need to see more evidence of a packed toolbox to get me to buy this stock.
At the time of publication, the author held no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.