Stanley Black & Decker (“Stanley”) (NYSE:SWK) has a significant growth opportunity on the horizon with its right to purchase the remaining 80% of MTD Products, Inc. (“MTD”) that it does not already own. This potential transaction would cause Stanley to enter the lawn and garden equipment market. This article summarizes the relevant facts as background information and analyzes the potential implications for Stanley. Overall, I believe Stanley’s planned acquisition of MTD Products, Inc. is a long-term bullish development for the stock.
Stanley’s investor relations website has a slide presentation that articulates management’s FY 2022 vision for the company. The primary strategic shift from 2018 to 2022 is the addition of lawn and garden equipment representing 15-20% of the portfolio by FY 2022. Slide 10 shows the “portfolio vision” with a pie chart of 2018 revenues and the pie chart of 2022 revenues. (August 11, 2020, investor presentation) Below is key information from the chart presented in table format.
|FY 2018 revenues||FY 2022 vision|
|Lawn & Garden||0%||15-20%|
|Tools & Storage||70%||50-60%|
Source: Stanley Black & Decker August 11, 2020, investor presentation
Background information about MTD Products, Inc. and the acquisition agreement with Stanley Black & Decker, Inc.
The plan for executing the strategic shift described above is the acquisition of one large lawn and garden equipment company. This story started in September 2018 when Stanley agreed to purchase 20% of MTD Products, Inc. for $234 million (September 12, 2018, press release). Stanley also acquired the right to purchase the remaining 80% of MTD from July 1, 2021, to January 2, 2029 (Stanley 12/31/19 10-K filing). The future purchase price will be based on a multiple of 2018 EBITDA and a sharing arrangement for any future EBITDA growth. In addition, two Stanley representatives joined the 11-person MTD board of directors. The transaction closed in January 2019 and the investment was reflected in the 2019 Stanley financial statements.
MTD manufactures and distributes lawn and garden equipment including, lawn mowers, snow throwers, trimmers and chain saws. The company’s brands include MTD, Yard Machines, Troy-Bilt, Cub Cadet and Remington. MTD revenues were greater than $2 billion in 2017 (Stanley September 2018 press release). MTD products can be found in major lawn and garden retailers like Home Depot and Ace Hardware. While the products are sold around the world, the business is primarily located in the United States.
The Stanley investor presentation from August 11 (linked above) also noted some additional facts about the MTD business which are listed below in bullet points (slide 21):
- MTD had revenue of $2.4 billion in 2019 with mid-single-digit margins
- Revenue mix – 85% North America and 15% rest of world
- Revenue mix – 60% consumer, 25% prosumer and 15% professional
NOTE – A Google search of the term “prosumer” yielded the following definition “an amateur who purchases equipment with quality or features suitable for professional use.”
The bullish case for Stanley’s planned acquisition of MTD
The acquisition of MTD is a long-term bullish development for Stanley for a number of reasons. First, Stanley articulates two primary factors in its August 2020 investment presentation linked above. These items are discussed in more detail below.
1. Stanley investor presentation and CEO conference call comments – attractive transaction price to acquire MTD
The August 2020 investor presentation (slide 21) referenced the MTD transaction with the following bullet: “unique deal structure assumes a low double-digit multiple on 2018 EBITDA, 5.5x multiple for EBITDA growth between 2018 and exercise date.” This quote provides great insight into the composition of the deal price. The portion of the purchase price based on 2018 EBITDA is fixed. Future EBITDA growth is considered in the purchase price based on 5.5x EBITDA which is much lower than the 2018 EBITDA multiple. This discount is welcome news for Stanley investors. Jim Loree, President and CEO, also commented favorably on the option to purchase the remaining interest in MTD during the July 30, 2020, earnings call. Below is a quote of his comments and a link to the transcript.
Jim Loree, President & CEO, commenting on MTD in the Q&A portion of the July 30 earnings release call: (Seeking Alpha earnings call transcript)
And then the MTD acquisition, which hopefully we will be able to do in early 2022, that’s going really well in terms of the cost takeouts that we had — are working with MTD on, making sure their margins get up to acceptable levels and also from a revenue point of view, MTD is doing quite well as well with significant growth at this period of time.
So that’s going to be a great story and that’s probably going to be about $3 billion when we exercise that option of revenue that we are going to bring on probably at a weighted multiple when you take into account the first 20% and then the second 80% will weighted multiple, probably be in the 7 times to 8 times EBITDA range, which is going to be just fantastic.”
The company is basically stating that its acquisition of MTD (100% of the equity) may be at a blended price representing 7x to 8x EBITDA. Investors can judge whether this multiple is a good price, however, it is my opinion that 7x to 8x EBITDA for a consumer product company like MTD is at least a fair price if not a good price. Jim Loree referenced the transaction price as “fantastic” in the quote above. I believe the price of this potential deal is a positive factor for Stanley. Often times investors learn about deal prices when the company has entered a definitive agreement to acquire the target. In these cases, the situation is immediately factored into the buyer’s share price and investors have little time to react. In the case of Stanley and MTD, investors have the opportunity to evaluate this purchase option over a long period of time. The market may not fully appreciate the price of this deal which gives investors an opportunity for upside. Furthermore, since this deal is structured as a purchase option, Stanley can judge how the business develops in relation to the fixed transaction price formula.
2. Stanley investor presentation – significant planned synergies with the MTD acquisition
Stanley’s August 2020 investor presentation (slide 21) notes that the MTD acquisition would be an “opportunity to leverage our scale, channel access, Craftsman brand & electrification technology.” Each one of these points is worth some deeper analysis. The reference to leveraging “scale” is relevant as MTD is referenced on the same slide as $2.4 billion in 2019 revenues whereas Stanley had $14.4 billion of 2019 revenues. Stanley is clearly a much larger company which provides greater leverage of resources such as supplier relationships and shared service centers. “Channel access” is also compelling when you consider that Lowes and Home Depot represented 21% and 15%, respectively, of the 2019 Stanley tools and storage segment revenues per footnote P of the 2019 10-K filing (Stanley 2019 10-K filing). Stanley clearly has significant business activity with these key home and garden retailers in the United States. This would help Stanley leverage distribution of MTD products. This is just one tangible example of channel access based on information from the 10-K but there are likely many other opportunities given the size of Stanley’s tools and storage segment at $10 billion in revenues (per Stanley 10-K) and similar distribution to MTD. Stanley also mentioned that the MTD acquisition would leverage the Craftsman brand. Stanley acquired this iconic American brand from Sears (OTCPK:SHLDQ) as noted in the 2019 10-K. MTD manufacturing facilities would provide Stanley with the capability to manufacture Craftsman branded equipment.
While Stanley’s investor presentation and company comments highlighted the synergies and favorable transaction price, I see three additional benefits to this potential transaction.
1. Substantial growth driver – If MTD were consolidated with Stanley for 2019, then Stanley’s revenue would have increased by 16.6% ($2.4 billion MTD revenue / $14.4 billion Stanley revenue per Stanley 10-K linked above). It is important to note that Stanley records its 20% investment in MTD as an equity method investment, so the MTD income statement and balance sheet are not consolidated with Stanley as of December 31, 2019 (per 10-K linked above – significant accounting policy footnote). The impact of this potential 16.6% revenue increase should be viewed in the context of Stanley’s recent history. Stanley’s revenue grew $3.2 billion or 29.3% from $11.2 billion in 2015 to $14.4 billion in 2019. This was achieved during a period when the company spent more than $3.2 billion on acquisitions from 2017 to 2019, excluding the initial MTD investment (per 2019 10-K cash flow statement – 10-K linked above). Therefore, the sole MTD transaction could increase revenues as much as four years of recent growth and significant acquisition spending. If the MTD margins can reach management’s target, then the deal would also have a similar impact on income. Net income was $884 million in 2015 and $956 million in 2019. This simple comparison illustrates the stagnation in the company’s results that would be significantly impacted by the inclusion of MTD.
2. Favorable geographic and big-box retailer presence – The geographic revenue mix of MTD would also match well with Stanley since 62% of the Stanley tools and storage division sales are in the United States (slide 5 of Aug 2020 investor presentation linked above). This matches well with MTD having 85% of revenues in North America. Finally, 85% of MTD sales are consumer or prosumer which matches well with Stanley’s significant presence in the major home improvement retailers Lowe’s (NYSE:LOW) and Home Depot (NYSE:HD) through the tools and storage segment (36% of 2019 segment sales per 10-K footnote P).
3. Mitigating risk through learning the business and improving margins – Stanley purchased 20% of MTD in early 2019 and gained two board seats. Jim Loree is quoted above as saying that the estimated timing of the acquisition is “early 2022” which is still about 18 months away. This acquisition timing would be three years after the initial investment which allows Stanley management to learn the business. While it may be possible for Stanley to learn the business quicker, this three-year period helps mitigate the risk that Stanley shifts approximately 20% of its portfolio into a new business where it doesn’t understand the business and doesn’t know how to succeed.
It also seems wise that Stanley defers the acquisition until MTD improves its operating margins as discussed above by Jim Loree. The purchase agreement has a provision to compensate the MTD owners for EBITDA improvements after 2018; however, it is worthwhile for Stanley to acquire the remainder of the business when it has appropriate margins to fit into the existing Stanley portfolio. For example, the 2019 segment operating profit of the tools and storage division (Stanley’s largest division by far), was 15.2% per footnote P of the 10-K linked above ($1,533 segment profit / $10,062 tools and storage revenues). This margin compares to MTD which is referenced as mid-single-digits in the investor presentation linked above. Clearly, MTD needs to improve its margins before getting consolidated into Stanley and this is the plan. The August investor presentation (slide 21) notes that the anticipated MTD acquisition in 2021 would have revenues of $3 billion and double-digit operating margins. Stanley is expecting the MTD margins to move from mid-single-digits to double-digits before the remaining 80% equity is purchased.
Clearly, MTD is an exciting opportunity for Stanley. Investors should also consider the potential risks of this deal. MTD primarily sells to consumers, so this transaction would shift Stanley’s business mix towards consumer products and further away from a diversified manufacturing company. The fortunes of Stanley may rise and fall with home improvement retailers like Home Depot and Lowes rather than the other major American industrial companies. The MTD transaction also achieves growth through acquisitions rather than organic development. Wall Street may place a higher value on a company that can grow organically rather than a company that always needs to find acquisition targets in order to grow. Finally, MTD would be an immediate boost to Stanley’s size; however, law and garden equipment isn’t necessarily a high growth market. MTD may ultimately lower the long-term growth rate of Stanley.
Overall, investors should consider MTD when analyzing an investment in Stanley. It is my opinion that MTD is a positive catalyst for growth at Stanley and overall bullish for the stock. Of course, this is a long-term story because Stanley has until 2029 to exercise its option and the earliest exercise date (July 1, 2021) is still more than 10 months away.
Disclosure: I am/we are long SWK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.