Snap-on (SNA, Financial) is expected to deliver its fourth quarter and full-year operations results on Feb. 2. Reviewing its previous operations may provide insights on whether shares would be a buy in the event of a short-term disappointment.
The $9.9 billion tools and services provider delivered its third-quarter fiscal 2016 results on Oct. 20, 2016. Snap-on delivered a 1.58% sales growth to $2.54 billion and 15.2% profit growth to $400 million in its nine months fiscal 2016 operations.
“We believe Snap-on’s third quarter results, including a 12.1% increase in diluted earnings per share and continued growth in organic sales, confirm our success in serving serious professionals performing critical tasks and in leveraging our Snap-on Value Creation Processes.
“The 140 basis point improvement in operating margin before financial services reflects our ability to drive ongoing improvements in safety, quality, customer connection and rapid continuous improvement. In the third quarter, we again received recognition for several of our new products with awards from both MOTOR Magazine and Professional Tool & Equipment News, providing further evidence of the winning innovation that results from actively connecting with customers and furthering our deep understanding of their work.” – Nick Pinchuk, Snap-on chairman and CEO
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Valuations
According to GuruFocus data, Snap-on had a trailing 12-month price-earnings (P/E) ratio of 19 times (industry median 21), price-book (P/B) ratio of 3.8 times (industry median 1.7) and price-sales (P/S) ratio of 3 times (industry median 1). Snap-on also had a trailing dividend yield of 1.5% with a 27% payout ratio.
Market performance
Snap-on outperformed the broader index on a long-term basis. According to Morningstar data, Snap-on had five- and one-year total returns of 28.6% and 4.7% compared to the Standard & Poor's 500 index’s 14.7% and 16.9%.
(10-Q)
Snap-on
Snap-on is a 96-year-old company that is a leading innovator, manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users (1).
Further, Snap-on shops equipment and other solutions for vehicle dealerships and repair centers. Snap-on customers include industries in aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation and technical education.
Snap-on also derives income from various financing programs designed to facilitate the sales of its products and support its franchise business.
Snap-on operates its business through multiple sales distribution sales in 130 countries. In fiscal 2015, Snap-on derived 69%, or $2.48 billion, of its sales from the U.S. and 17.7% from Europe.
Snap-on has four reportable business segments: Commercial & Industrial Group, Snap-on Tools Group, Repair Systems & Information Group and Financial Services.
(10-K and 10-Q Filings)
Commercial & Industrial Group
According to Snap-on, this segment consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government and technical education market segments.
In fiscal 2015, commercial and industrial had -1% change in its sales to $1.16 billion while delivering an operating margin of 14.6% compared to 13.5% the prior fiscal year. The segment contributed 30% in total Snap-on sales when excluding eliminations and financial revenue contribution.
Nine months into fiscal 2016, commercial and industrial sales still had negative growth with -2.2% change to $862 million while having a 14.4% operating margin.
Snap-on Tools Group
The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel.
In fiscal 2015, sales of the tools group grew by 7.8% to $1.57 billion while delivering an operating margin of 16.3%. The segment contributed 41% in total Snap-on sales, excluding eliminations and financial revenue contribution.
Nine months into fiscal 2016, segment sales grew by 5.1% and delivered a 17.1% operating margin, compared to 15.9% the year prior.
Repair Systems & Information Group
The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide. Snap-on’s customers are primarily owners and managers of independent repair shops and OEM dealerships, through direct and distributor channels.
In fiscal 2015, repair systems and information sales grew by 1.6% to $1.11 billion while delivering an operating margin of 24.6% –Â most profitable among Snap-on’s segments excluding financial services. The segment contributed 28.9% in total Snap-on sales, excluding eliminations and financial revenue contribution.
Nine months into fiscal 2016, segment sales grew by 3.3% and delivered a 25% operating margin, compared to 24.2% the year prior.
Financial Services
Financial Services consists of the business operations of Snap-on Credit LLC –Â the company’s financial services business in the U.S. and Snap-on’s other financial services subsidiaries in those international markets where Snap-on has franchise operations.
Financial services is Snap-on’s fastest-growing segment. In fiscal 2015, Snap-on’s financial services sales grew by 11.8% to $240.3 million while delivering an operating margin of 70.8% – the most profitable in all of Snap-on’s segments. The segment contributed 6.7% in total Snap-on sales.
Nine months into fiscal 2016, segment sales grew by 16.9% and delivered a 71% operating margin, compared to 70.7% the year prior.
Overall, Snap-on had five-year sales, profit and operating margin averages of 5.1%, 20.8% and 19.4% (2).
Cash, debt and book value
As of October, Snap-on had $118 million in cash and $896 million in debt with a 0.33x debt-equity ratio, compared to 0.40x the prior year. 21.2% of Snap-on’s $4.6 billion assets were goodwill and intangibles with a book value of $2.7 billion, compared to $2.36 billion year on year.
Cash flow
(10-Q)
Nine months into fiscal 2016, Snap-on grew its cash flow from operations by 18% to $415.6 million. Snap-on presented a healthy cash flow growth secondary to reduction in receivables and inventories.
Capital expenditures for the company were $56.6 million, leaving Snap-on with $359 free cash flow, compared to $287.8 million the year prior. Snap-on allocated 51%, or $182.7 million, of its free cash flow in dividends and share repurchases. On average, Snap-on allocated 56.8% of its free cash flow in dividends and share buybacks in the past three fiscal years.
Snap-on reduced its debt by $5.3 million while taking in $20.1 million in short-term borrowings and notes payable.
Conclusion
Dissecting Snap-on’s different business segments revealed that the company has solid running and profitable groups businesses. The industrial company also outperformed the broader index on a long-term basis. In addition to having a healthy balance sheet, Snap-on also runs a decent cash flow operation.
(Snap-on Market Price and P/E (ttm) ratio in one year; GuruFocus data)
While its shares are hovering near its all-time highs, Snap-on shares still trade at some discount to its peers in terms of its P/E ratio. Meanwhile, valuation based on historical earnings multiple indicated a value of $140 a share (3).
Despite Snap-on’s increasing profitability and whether it meets expectations in its coming earnings release, valuation indicated the company’s shares are currently a pass unless they fall precipitously.
Notes
(1) Moving forward, information would be derived from 10-K and 10-Q unless specified.
(2) Morningstar data.
(3) Me: five-year P/E average of 17.8, profit growth average of 20.75% and a 20% margin.
Disclosure: I do not have shares in any of the companies mentioned.
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