Tool Up For This Stock

The U.S. construction boom is nowhere near slowing down.

Housing inventory remains at historic lows while commercial buildings can’t go up fast enough.

And you know what makes this all work?

Tools.

Hammers, screwdrivers, pry bars…you name it, we need it.

Snap-On Inc. (SNA) is positioned better than any other tool stock out there, save Stanley Black and Decker (SWK). But we see a lot more potential with Snap-on.

Although the stock wasn’t widely searched by financial pros over the last month, we think that’s about to change.

You see, Snap-On has a 5-year dividend growth rate of 14.96% and currently yields 2.76%, and they’re virtually debt free.

This gives confidence they’ll be able to maintain the current dividend and growth rate, which is pretty important.

Snap-On’s Business

Headquartered in Kenosha Wisconsin, Snap-On Incorporated creates professional tools and equipment for a broad range of industries including automotive, construction, and aerospace.

Products range from powerful hand tools to vehicle diagnostic equipment to basic hammers.

You can find Snap-On’s products through multiple distribution channels in over 130 countries.

Snap-On operates four main segments:

• Snap-on Tools Group (40% of 2021 Total Revenues): The segment consists of the business operations serving the worldwide franchise channel. 
• Commercial & Industrial Group (29%): This segment comprises business operations providing tools, equipment products, and repair services to industrial and commercial customers worldwide through direct, distributor, and other non-franchise distribution channels.
• Repair Systems & Information Group (31%): The segment consists of diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace.
• Financial Services: This segment offers financing and loans to franchisees’ customers and clients.

Over the last few years, management has focused on its Value Creation model as well as other cost-reduction plans including the Rapid Continuous Improvement (RCI) program which aims to enhance organizational effectiveness and minimize costs.

So far, they’ve been successful as margins expanded along with sales volume.

The company’s growth strategy relies on enhancing the franchise network, improving relationships with repair shop owners and managers, and expanding critical industries into emerging markets.

Financials

Snap-On is one of those consistent performers you want to have in your retirement portfolio.

The company grew revenue at an average rate of 4.89% over the last decade with an expansion of 16.73% in 2021.

During that same period operating income grew at an average of 9.41% per year and net income at 11.5% per year.

Remarkably, capital spending stayed pretty constant. That helped lift free cash flow by more than 300% during that same time.

Additionally, the company has maintained a healthy dividend over the last 12 years that’s increased at a pretty rapid clip.

And with only $1.6 billion in long-term liabilities, $780 million in cash, and free cash flow of almost $900 million per year, management has ample room to invest in expansion, growth, and cost initiatives.

However, not everything is sunshine and roses.

Higher raw material costs are catching up with the company, putting more pressure on margins that will either compress or lead to price increases for customers.

Valuation

We were pleasantly surprised when we looked at Snap-On’s valuation and found that most of the measures beat the 5-year historical average.

This struck us as odd considering shares traded in a range of $140-$180 from most of 2015-2020, while they are over $200 today.

The only measures that gave us some concern were the price to sales ratio relative to the industry. With forward revenue growth expected to land at 8.74%, we think shares might be pricing in more than the rest of the industry.

Nonetheless, valuations are reasonable.

Our Opinion – 8/10

There are two reasons we didn’t give this stock a 10/10.

First, we believe shares haven’t adequately priced in inflation on raw materials that will hurt margins in the next few years.

Second, management has everything they need to grow their business but no ‘big idea’ that’s driving them forward. We want to see something in that arena, whether it be digital connectivity or otherwise.

Where do shares become a 10/10? Probably down in the previous range of $160-$180 per share.