DeBLASEing the Trail | 2Q23 Estimation & Fact-Deutsche Bank Research

We model -$0.08 3Q23 adj. EPS for Buy-rated SYM, which implies a $0.06 miss vs. -$0.02 consensus. However, for the more important adj. EBITDA metric (which management guides to), we are in line with the Street, at -$9m; this also sits near the midpoint of -$11m to -$8m management guidance. Our forecast is predicated on 50% organic growth and 27% incremental gross margins. Organic growth by segment: Systems 50%, Software Subscriptions 75%, and Operation Services 55%. Gross margin by segment: Systems 22.5%, Software Subscriptions -37.7%, and Operation Services -12.0%. The company typically does not provide FY guidance, but does guide for the next quarter's adj. EBITDA. We think guidance could suggest a result approaching breakeven.

IN FACT

During the third quarter, the company deployed six new systems and advanced one to full operation, bringing the total number of fully operational systems to 10. Additionally, 33 systems are currently in the process of deployment with multiple customers, which is an increase from 28 systems last quarter and 13 systems in the same quarter last year. The sales and deployment progress for platform purchases has been rapid, with new deployments added every quarter from multiple customers. Recurring revenue has continued to grow as deployments move to production, and the company expects this to drive higher gross margins than systems revenue. Operating leverage improved sequentially, with adjusted EBITDA loss rates decreasing from 4% last quarter to 1% in the current quarter, driven by rapid revenue growth and gross profit growth along with slower operating expense growth. The company's cash and equivalents grew $48 million sequentially to $513 million. For the fourth quarter of fiscal 2023, the company expects revenue between $290 million and $310 million and to report its first profitable quarter with adjusted EBITDA of between zero and $3 million positive.

We model -$0.33 EPS for Hold-rated SWK’s 2Q23, or a 13%/$0.05 beat vs. -$0.38 consensus, and modestly ahead of -$0.40 company guidance. Our estimate assumes a 4% organic decline (vs. -9% in 1Q23); within the mix, we model a 5% decline in Tools & Outdoor (vs. -11% in 1Q23; volume -5% and price flat), partially offset by 5% growth in Industrial (vs. +3% in 1Q23; volume +3% and price +2%). We forecast segment margins down ~570bps Y/Y to 4.8% implying hefty ~145% decremental margins as the company works to reduce its bloated inventory balance and consequently suffers from under-absorption. To this point, we believe inventory reduction progress will be key, and much of this should be accomplished in 2Q23. Considering our view that the current full year guidance is not overly conservative, we expect the company to reiterate the $0-2 EPS range (with a bias towards the lower half).

IN FACT

Stanley Black & Decker reported solid progress on its transformation journey in the second quarter of 2023, with an aggregate program to date reduction of $1.4 billion in inventory and pre-tax run-rate savings of $230 million from the Global Cost Reduction Program. While revenue was down versus the prior year due to lower consumer Outdoor and DIY volume, demand remains solid for the professional side of the market, which represents roughly 70% of the Tools business. The US retail point-of-sale for Tools and Outdoor products remained in a growth position this quarter versus 2019 levels, bolstered by price and healthy pro demand, while the European markets are experiencing similar trends with softer DIY markets balanced with healthier levels of construction activity and professionals with backlogs through the end of this year. Stanley Black & Decker improved adjusted gross margin for the quarter, narrowed its 2023 full-year adjusted diluted EPS guidance to a range of $0.70 up to $1.30 and narrowed its free cash flow range to $600 million to $900 million, and experienced continued strength in global automotive and aerospace across its industrial end markets.

We model $5.01 EPS for Hold-rated CAT, which implies a $0.47/10% beat vs. $4.54 consensus. This is predicated on 17% organic growth in ME&T (vs. +19% in 1Q23), with price +11% and volume +6%; within the mix, we model CI +12% organic (vs. +13% in 1Q23), RI +22% organic (vs. +23% in 1Q23), and E&T +21% organic (vs. +27% in 1Q23). We model operating margins up 840bps Y/Y but down 50bps Q/Q to 23.5%, consistent with typical seasonality across all three segments. But 2Q results are backward-looking, and so we expect the share price reaction to depend more on backlog depletion and dealer inventory levels. For reference, backlog seasonally tends to decline HSD-LDD Q/Q, while dealer inventory tends to decline $0.5-1.5bn Q/Q in 2Q. We believe a backlog outcome worse than normal seasonality and/or a dealer inventory reduction decline less severe than normal seasonality could underpin share price underperformance (or vice versa). That said, investor positioning on the stock is quite negative going into the print, perhaps lowering the bar.

IN FACT

The company had a strong second quarter with sales and revenues increasing by 22% year-over-year, resulting in higher adjusted operating profit margin and ME&T free cash flow. The supply chain continued to improve, allowing for increased production, but large engines remained a challenge for energy and transportation and some larger machines. Sales volumes were higher than expected due to an increase in dealer inventory relating to energy and transportation supported by customer orders, with double-digit increases in all three primary segments. Sales to users increased by 16% compared to the same period last year, with Energy & Transportation seeing the biggest increase of 47%. Adjusted operating profit margin was better than anticipated, primarily due to better than expected volume growth and lower manufacturing costs, including freight. The company generated $2.6 billion of ME&T free cash flow in the quarter and returned $2 billion to shareholders in dividends and share repurchases. The backlog at the end of the quarter was $30.7 billion, and the company expects its 2023 results to be better than previously anticipated.

We model $2.13 EPS for Buy-rated ETN, which implies a $0.02/1% beat vs. $2.11 consensus and sits near the upper end of the $2.04-2.14 guidance range. We embed 11% organic growth (vs. +15% in 1Q23 and +10-12% guidance), primarily driven by continued strength in Electrical Americas (+15% vs. +22% in 1Q23 and in line with mid-teens guidance) and Aerospace (+12% vs. +13% in 1Q23 and in line with +12% guidance). Elsewhere, we project 7% organic growth in Electrical Global (vs. +8% in 1Q23 and +6-7% guidance), 5% within Vehicle (vs. +11% in 1Q23 and +MSD guidance), and 30% organic growth in eMobility (vs. +18% in 1Q23). We embed 28% incremental margins this quarter, a bit below ETN's normal 30% target, but this still yields 20.9% segment margins, at the high end of 20.5-20.9% guidance. We expect the midpoint of 3Q guidance to be positioned above consensus of $2.24 (perhaps in a $2.20-2.30 range), and believe the company is also likely to raise its current $8.30-8.50 full year EPS guidance range (we currently sit at $8.55).

IN FACT

The company reported record Q2 results with strong organic growth of 13%, operating profit growth of 21%, and segment margins expanded to an all-time quarterly record of 21.6%. Adjusted EPS increased by 18% over the prior year to $2.21, beating the high end of guidance. Electrical Americas reported all-time quarterly records for sales, operating profit, and segment margin with organic sales growth of 19% and operating margin of 26.4%. Orders grew 7% on a rolling 12-month basis with strength in data center and distributed IT, industrial and commercial and institutional end markets. The major project negotiation pipeline was up more than 17% versus prior year and nearly 9% sequentially. Additionally, free cash flow increased by 600% in the first half of the year to 900 million due to better optimization of working capital.