Shares of Stanley Black & Decker Inc. (SWK, Financial) have declined nearly 7% over the last month as the S&P 500 Index has climbed just over 2%.

With this pullback in price, the tool manufacturer now trades below both its medium- and long-term average valuation and is considered to be fairly valued by GuruFocus.

Let’s examine the company’s most recent quarter and why I am looking to buy more shares as the stock goes lower.

Earnings highlights

Stanley Black & Decker reported second-quarter earnings results on July 27. Revenue was up nearly 37% to $4.3 billion, topping Wall Street analysts’ estimates by $68 million. Adjusting for merger and restructuring charges, adjusted earnings per share of $3.08 was a 93% improvement from the prior year and 18 cents ahead of expectations.

Organic growth was 33% for the quarter. Growth was led by a significant improvement in the Tools & Storage segment, which is the largest within Stanley Black & Decker. Organic revenue grew 41% to $3.2 billionand profit surged 73%. Much of this gain was due to a 38% increase in volumes, but currency exchange added 5% and higher prices contributed 3%. Each region demonstrated gains as emerging markets improved 85%, Europe climbed higher by 63% and North America increased 30%.

North America benefited from higher demand from both professional and retail customers. Popular categories included home and garden and outdoor electrification. Europe saw gains in commercial and retail channels, while emerging markets experienced higher construction-related demand. E-commerce was strong throughout the different regions.

Revenue for the Industrial segment grew 14% to $602 million, while profit was up 43%. Volume growth of 13% was the main driver of gains in this segment. Infrastructure remains challenged as sales fell 11% year over year. As with prior quarters, this was mostly due to oil and gas pipeline project activity that was well below normal levels. Attachment tools were up 16%. On the other hand, Engineered Fastening improved 26% as automotive and general industrial markets were only partially offset by lower demand in aerospace. The shortage of semiconductors also weighed on results.

Security organic revenues were higher by 14% to $502 million with profit inching up 3%. Recent divestitures reduced results by 5%, but this was more than offset by contributions from volume, currency and pricing. North America grew 16% as Stanley Black & Decker was able to convert more of its commercial electronic security backlog. Automatic doors and health care were also highlights for the quarter. Europe was up 12% due to strength in demand for data-driven product solutions in France and the Nordic countries.

Nearly every other metric also showed substantial growth. Excluding charges, the gross margin improved 240 basis points to 35.9%, while the operating margin expanded 270 basis points to 15.5%. Selling, general and administrative expenses as a percentage of revenue fell 30 basis points to 20.4%. Free cash flow improved 28% to $339 million.

Following results, leadership raised its guidance for the year. The company now expects adjusted earnings per share of $11.35 to $11.65, up from $10.70 to $11 previously. This is the second consecutive quarter that Stanley Black & Decker has upped its guidance following results.

Takeaways and valuation analysis

The second quarter was the third straight period where Stanley Black & Decker reported at least mid-double-digit revenue growth. This was also the second consecutive quarter that had at least 34% top-line growth.

No doubt, some of this is attributable to the weakness seen last year. Revenue for first-quarter 2020 and second-quarter 2020 were down 6.1% and 16.3% year over year, respectively, last year. Topping these numbers was widely expected.

Even so, Stanley Black & Decker came in above what analysts had anticipated for both revenue and earnings per share. Dating back to pre-pandemic 2019, revenue was up 14.4% and adjusted earnings per share was up almost 20%. This provides some evidence to the strength of the company’s businesses, of which it is an industry leader.

One way Stanley Black & Decker has bolstered its core business is through the use of acquisitions. The purchasing of the Craftsman Brand in 2017 is a prime example of this philosophy. That purchase contributed to growth in North America every quarter except for the first two of last year. This is but one example of an addition helping to improve Stanley Black & Decker’s standing in a particular business.

More recently, Stanley Black & Decker announced it agreed to acquire the remaining 80% stake in MTD Holdings Inc. that it didn’t own. MTD Holdings, a privately held global manufacturer of outdoor power equipment, counts brands such as Troy-Bilt and Cub Cadet among its products. Stanley Black & Decker first purchased a 20% stake in the company in 2019.

As a global leader in the growing outdoor market, which is valued at $25 billion, this acquisition should materially impact Stanley Black & Decker’s business. MTD Holdings is expected to add $2.6 billion of revenue and 50 cents to adjusted earnings per share in 2022.

One area of concern is the company expects commodity costs to be a $300 million headwind in 2021, up from $235 million in the first quarter of the year. That said, higher prices and increased productivity will offset around half of this impact. The company also successfully passed higher prices along to consumers in the most recent quarter without much impacting demand seemingly at all.

The company’s business performance over the long term has also allowed it to achieve Dividend King status. Stanley Black & Decker announced a 12.9% dividend increase on July 21, marking 54 consecutive years of dividend growth. This was also the company’s largest dividend increase since 2012.

The stock trades at around $187. Using the midpoint of the company’s revised guidance, shares have a forward price-earnings ratio of 16.3. The stock has an average price-earnings ratio of 17.4 and 16.5 over the past five and 10-year periods. By either measure, Stanley Black & Decker is slightly undervalued today.

Shares now trade closer to their intrinsic value as calculated by GuruFocus.

With a GF Value of $171.52, Stanley Black & Decker has a price-to-GF Value of 1.09. This earns the stock a rating of fairly valued from GuruFocus. As you can see from the chart, Stanley Black & Decker’s price-to-GF Value is now at one of its more favorable ratios in recent times.

Final thoughts

Stanley Black & Decker reported an excellent second quarter with a boost to its expected adjusted earnings per share for 2021. The company saw growth in every segment and almost every business. Recent results are also ahead of where they were prior to the Covid-19 pandemic. The stock is just above its intrinsic value and trades below its medium- and long-term average valuations. Stanley Black & Decker has one of the longest dividend growth streaks in the market.

Investors interested in the name might want to consider using the recent decline in share price as a good entry point. The company’s business leadership, recent earnings results and guidance raise, combined with its lengthy dividend growth streak and the highest dividend increase in nearly a decade, have me believing that Stanley Black & Decker would be a good addition to one’s portfolio.