This Must-Buy Big Name Is on Sale Stanley Black & Decker is solid, growing strongly -- and a bargain

Some of the world’s greatest investments are often sitting right under your nose. While rummaging through my garage the other day, I came across a hammer. I know what you’re thinking: I’m going to talk about Home Depot (NYSE:HD). Nope, I’m going one better. Home Depot has to shell out a lot of money to build and maintain these stores.

Instead, I’m going to talk about a company whose name requires Home Depot to stock its products. That name is Stanley Black & Decker (NYSE:SWK).

The company offers products and services across hand tools, power tools and accessories, construction tools of all kinds, industrial and automotive repair gear, engineered fastening systems, infrastructure solutions, mechanical security systems and even health care. Chances are you’ve got a Black & Decker something in your house somewhere.

This is exactly the kind of company that’s easy to overlook when thinking of investments. Yet it makes things that are essential to everyday life and that you can find on store shelves around the world.

I expected Stanley Black & Decker to be in the stalwart category — an 8% to 10% earnings per share grower, with a solid balance sheet and a little dividend. Turns out it’s a serious growth stock, which also has a solid balance sheet and a little dividend. Analysts see 15% earnings growth in 2012, and 14% next year, with an 18% annualized rate over the next five years. This is a gigantic leap in earnings following a 50% pop in fiscal 2011, which came on the heels of consecutive years of declining net income. Can you say “economically sensitive”?

But that’s also what’s so great about hopping into companies like this as the economy turns. Although growing at an 18% clip going forward, it trades at only 12x fiscal 2012 earnings. That gives it a price-earnings to growth (PEG) ratio of 0.66, making it also a serious value play (a PEG of 1.0 is considered fairly valued).

And yes, the balance sheet looks good: $851 million in cash offset by $2.74 billion in debt, which is costing the company only about 5% annually in interest expense. Free cash flow was $560 million over the trailing 12 months, which is about twice what Stanley Black & Decker needed to pay the 2.3% dividend. The company said it expects to double that in fiscal 2012.

It’s also instructive to take apart last week’s earnings report. Total revenues were up 17% in Q4, much of it from acquisitions, but there was 7% organic growth in the industrial segment. Asia grew 12% for the quarter and 18% for the year. All this provides yet more evidence that cyclicals are coming back. I just wrote about railroads[3], which are seeing an uptick in shipments of raw and finished goods.

Now’s the time to keep an eye out for stocks in this sector. You want to be in on cyclicals at the start of the new economic cycle, but also be aware that unexpected headwinds could slow growth.