Call Options Or Put Options On Stanley Black & Decker (SWK)?

| October 24, 2012 | 0 Comments

SWK OptionStanley Black & Decker (SWK) is the largest power and hand toolmaker in the US.

SWK currently trades for $69.37 per share.  The shares are up 19% from the 52-week low of $58.16.  But the stock is down 14% from the 52-week high of $80.77.

Is this an opportunity to buy call options on SWK as the pace of new home construction accelerates?  Or should you buy put options on SWK as the global economy slows?

The bulls make a convincing argument…

SWK reported solid 3rd quarter earnings last week.  The toolmaker earned $1.40 per share as sales surged 6% from same quarter last year. 

Here’s the thing…

So far, the revival in home construction in the US hasn’t translated into more sales for SWK.  But this anomaly is unlikely to last…

Put simply, homebuilders need tools to build houses.  And I’m expecting tool sales to accelerate as builders pick up the pace of home construction.

What’s more, SWK is selling its hardware and home improvement group for $1.4 billion in cash.  The influx of cash should give SWK the ability to deliver shareholder value by refocusing the business with new acquisitions and a potential stock repurchase plan.

But the bears have a compelling case as well… 

SWK’s 6% jump in sales last quarter isn’t all it’s cracked up to be. 

The majority of those gains came from an acquisition SWK made in September of last year.  But organic sales growth was almost non-existent.

Next quarter SWK won’t get the benefit of the sales growth from the acquisition.  And all they’ll be left with is their organic sales growth. 

In fact, management was forced to revise down their expectations for organic growth to just 1% this year.  And as a result, they cut their full year 2012 EPS estimates from a range of $5.40 to $5.65 to just $5.25.

What’s more, SWK is spending more money than they planned in order to keep organic sales growth moving at a meager 1%.

That’s an ugly combination of slowing sales and rising costs that should keep SWK moving lower through the end of the year. 

If you think the bulls are right, take a look at buying the SWK January 2013 $72.50 calls for around $2.15.

If you think the bears are right, take a look at buying the SWK January 2013 $65 puts for around $2.25.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.