We came across a bullish thesis on Snap-on Incorporated (SNA) on Substack by William Fleming-Daniels. In this article, we will summarize the bulls’ thesis on SNA. Snap-on Incorporated (SNA)’s share was trading at $361.85 as of Nov 11th. SNA’s trailing and forward P/E were 18.60 and 18.02 respectively according to Yahoo Finance.
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Snap-on Incorporated (NYSE: SNA) has solidified its position as a leader in the tool and diagnostics market, serving industries like automotive, aerospace, defense, and manufacturing. Known for its premium hand tools, diagnostic equipment, and custom solutions, Snap-on operates through four key segments: Snap-on Tools Group, Repair Systems & Information (RS&I), Commercial & Industrial (C&I), and Financial Services. The company’s tools segment, the largest by revenue, relies on its franchise model, where mobile stores provide direct access to Snap-on’s tools. While the segment has faced some mixed results recently, particularly in the U.S., Snap-on’s diversified operations help stabilize its business through fluctuations in the economy. The RS&I segment benefits from the increasing complexity of automotive systems, such as hybrid and electric vehicles, supporting growth in both OEM dealerships and independent repair shops. The C&I group serves industries like aviation and military, while the Financial Services segment supports tool sales through installment financing and leasing.
Snap-on’s financial performance has been consistent, with revenue growing at a 4% CAGR over the past decade and net income expanding at a 10% CAGR, driven by operational efficiencies. Despite a slight decline in revenue during Q3 2024, the company has maintained strong margins, supported by initiatives like Rapid Continuous Improvement (RCI). The company’s operating margins have reached around 22%, with net margins surpassing 20%, which is well above industry averages. Snap-on’s balance sheet is robust, with a current ratio of 4.1 and a low debt-to-equity ratio of 0.2, giving the company flexibility to reinvest in growth, maintain its dividend, and conduct share buybacks. This financial strength has allowed Snap-on to generate over $1 billion in annual operating cash flow and increase its dividend for 28 consecutive years, making it a reliable income stock.
The company has several growth opportunities, including increasing demand for automotive repair services, driven by an aging vehicle fleet and more complex automotive technology. Snap-on also sees growth in its C&I segment, particularly in aerospace, defense, and natural resources. The company is expanding into emerging markets, where the growing automotive and industrial sectors create demand for Snap-on’s products. Additionally, a reduction in steel costs is supporting improved margins. Snap-on is also committed to returning capital to shareholders, with a dividend yield of 2.7% and share repurchases amounting to $200 million annually.
Snap-on trades at an attractive 2024 P/E ratio of 17.17 and a forward 2025 P/E of 16.51, reflecting its stable cash flow and consistent dividend growth. Snap-on’s valuation, based on an EV/EBITDA multiple, suggests an enterprise value range of $19.7 billion to $26.3 billion, with a potential stock price of up to $445 per share, offering significant upside. Despite these strong fundamentals, there are risks to consider, including the potential rise in corporate tax rates, which could elevate Snap-on’s effective tax rate from 22% to closer to historical levels of 31%, reducing net income and limiting its ability to raise dividends or fund buybacks. Additionally, a recession in 2025 could impact revenue, particularly within its Tools Group, as technicians may delay large purchases and focus on essentials. This could put pressure on Snap-on’s high-value tool sales and impact growth within its Commercial & Industrial segment. In light of these risks, Snap-on’s growth rate may slow, affecting its valuation and appeal as a dividend stock. However, for dividend-focused investors, Snap-on remains a solid choice due to its operational efficiency and reliable income generation.
Snap-on Incorporated (SNA) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 27 hedge fund portfolios held SNA at the end of the second quarter which was 28 in the previous quarter. While we acknowledge the risk and potential of SNA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SNA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.