Analysts' Choice: Retool For Growth With Snap-On

7/17/2017


  Recent Price
$153
  Dividend
$2.84
  Yield
1.9%
  P/E Ratio
16
  Shares (millions)
59
  Long-Term Debt as % of Capital
21%
  52-Week Price Range
$181.73 - $145.17

When you hear the name Snap-on ($153; SNA), you probably think tools.

So do auto mechanics, which helps explain the company's success. According to a 2016 survey of mechanics by consultant Frost & Sullivan, Snap-on was rated the preferred brand for hand tools (69% of respondents), diagnostics (62%), and power tools (42%). The No. 2 brand received only 11% support in hand tools and 15% in power tools.

Snap-on knows how to turn that brand recognition into business. Over the last five years, per-share profits rose at an annualized rate of 14% while operating cash flow increased at a 31% pace. Analysts expect per-share-profit growth of 10% this year and 12% next year.

At 16 times trailing earnings, Snap-on trades 34% below the median maker of industrial machinery and 10% below its own five-year average. Yielding 1.9%, Snap-on was initiated as a Long-Term Buy in the July 3 issue.

Age makes opportunity

A quarter century ago, the average U.S. vehicle was seven years old. Since then, average age has trended upward; last year the typical car on the road was 11.6 years old. The trend shows no sign of reversing, and older vehicles mean more demand for servicing. Good news for Snap-on.

Vehicles continue to grow in complexity, with a greater need for diagnostics. Also good for Snap-on, which generates more than 20% of its sales from diagnostics and repair information. Tools account for about 55% of sales, with the remaining 25% coming from equipment such as vehicle lifts, wheel balancers, and battery chargers.

Snap-on sells to about 700,000 repair shops in North America and Europe and has invested heavily in emerging markets, where the repair business is booming as more people become wealthy enough to own cars.

Back in 1920, Snap-on pioneered the mobile-sales concept for tools, using vans to reach individual mechanics at their place of business. Today, Snap-on franchisees operate nearly 5,000 of these mobile stores (39% of company revenue in 2016). The company also markets its tools and equipment to owners and managers of repair shops and car dealerships (28% of revenue) and provides financial services such as tool leases (6%). Most of the last 27% of revenue comes from customers outside of the auto-repair business, including aerospace, power generation, and mining.

Snap-on has a history of using acquisitions to broaden its product line, most recently buying inspection-software developer BTC global for $9 million in January, torque-wrench designer Ryeson for $13 million in November, and Car-O-Liner, a maker of collision-repair equipment, for $148 million in October.

Rising margins and dividends

Operating profit margins have been trending upward for a decade. Margins topped 19% last year, up from 15% three years ago and 6.5% a decade ago. That increased profitability has helped support higher dividends. The quarterly payout has increased at an annualized rate of 24% over the last eight years and 21% over the last three.

You can obtain an annual report for Snap-on Inc. at 2801 80th St., Kenosha, WI 53143, (262) 656-5200, www.snapon.com.

SNAP-ON
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '17
2.39
vs.
2.16
7%
181.73
-
162.24
20 - 18
Dec '16
2.47
vs.
2.22
5%
177.86
-
145.17
20 - 16
Sep '16
2.22
vs.
1.98
3%
163.98
-
146.08
19 - 17
Jun '16
2.36
vs.
2.03
3%
165.33
-
147.50
20 - 18
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
3.71
9.20
2.54
177.86
-
133.09
19 - 14
2015
3.59
8.10
2.20
174.52
-
129.14
22 - 16
2014
3.49
7.14
1.85
140.22
-
96.24
20 - 13
2013
3.24
5.93
1.58
109.74
-
76.60
19 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
84
69
80
94
80
14
18

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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