Stanley Black & Decker: Stock Jumps with Guidance Boost
Rationale for previous guidance
Stanley Black & Decker (SWK) has been reeling from the impact of the dollar strengthening. The dollar gained momentum towards the end of last year and the company, perhaps anticipating the worst, expected currency headwinds between $170 million and $190 million in January. The company measures currency headwinds based on the spot rates at the time of guidance declaration.
Retreat of the dollar
Towards the end of 1Q16, we saw the dollar retreat for the first time since last year, and some of the weakened currencies regained their strength. Chief among these currencies were the Canadian dollar, the Brazilian real, the Argentinian peso, and the euro. In light of the latest developments, SWK now sees an impact of $140 million, a reduction of $40 million from the midpoint of the previous guidance.
Transactional versus translational currency exposure
The company’s split for the currency headwinds worsened, as 75% of $140 million headwinds are expected from transactional exposure and 25% are expected from translational exposure. In January, the company announced a split of two-thirds to one-third in transactional to translational exposure, respectively.
Investors should note that translational risks arise when a company operating overseas has to consolidate its foreign currency assets and liabilities in its home currency. Transaction risk arises when the company has a committed cash flow to be paid or received in a foreign currency. For example, consider a company that sells its product in a foreign country and is scheduled to receive its payment 90 days later. If the company’s home currency were to strengthen, then the company will have to take a loss on the foreign currency transaction. Higher transaction risk leads to lower operating margins for the company.
Investors interested in trading in the industrial space could look into the Guggenheim S&P 500 Equal Weight Industrials ETF (RGI), and those interested in trading in dividend-based ETFs could consider the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). Major holdings in NOBL are Nucor (NUE) and Illinois Tool Works (ITW), with respective weights of 2.5% and 2.3%.
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