Snap-on Inc. (SNA, Financial) makes and markets tools, diagnostics, equipment, software and service solutions for professional technicians. It is the top player in the U.S. tools industry thanks to an unmatched reputation among repair technicians, with customers valuing the company’s high-quality products, as well as its exceptional customer service.
The stock looks just as high-quality with a solid history of capitail gains, a good dividend and a fair valuation.
Business model differentiation
Snap-on's products and services are used by a wide range of professionals, including automotive technicians, mechanics, electricians, plumbers and HVAC technicians, but they’re not sold in retail stores. This allows Snap-on to provide personalized service and support to end-users. It also helps Snap-on avoid the retail challenges companies like Stanley Black & Decker (SWK, Financial) have had.
Snap-on tools and diagnostic products are designed to improve productivity by helping customers complete repairs faster, a key advantage in the competitive repair industry, where speed and efficiency can make all the difference. Customers are willing to pay a premium for Snap-on's tools due to their durability, convenience and flexible financing options.
Incredible brand tradition
The company was founded in 1920 by Joseph Johnson and William Seidemann, who began manufacturing and selling interchangeable sockets and wrenches. The business manufactured and marketed 10 sockets that would "snap on" to five interchangeable handles. The company's slogan was "five do the work of 50." They initially sold 500 sets. In the early years, Snap-on primarily sold its products through catalogs and direct mail, and later through industrial supply houses and automotive parts stores.
In the 1930s, Snap-on began selling its products through its own network of company-owned stores, primarily in major metropolitan areas, reaching $1 million in annual sales in 1935. By the 1950s, Snap-on had expanded its network of company-owned stores to over 80 locations, and had begun to experiment with franchising as a way to expand its sales network further. By the 1960's, the company had launched the franchise program, offering them to entrepreneurs who wanted to operate their own mobile tool stores.
The franchise program proved to be highly successful, and quickly became the primary way that Snap-on sold its products. Today, the company has over 4,600 franchisees operating mobile stores across the United States, Canada, Europe and other parts of the world. The initial fee for a Snap-on Tools franchise is between $8,000 to $16,000 with a total investment required ranging from $201,433 to $465,436 and on average, the franchisees earn north of $200,000 a year. It's a win-win-win for everyone.
Stellar financial performance
From 2013 to 2022, Snap-on grew revenue from $3.2 billion to over $4.9 billion while nearly tripling its net income, which increased from $350 million to $943 million over the same period. More importantly, the company seems to have done everything right from a financial management standpoint. It’s increased its dividend payment every year in the last decade, while at the same time buying back around 9% of shares outstanding, and growing retained earnings by $4.15 billion. That translated into $8.42 billion in market value, or $2 in growth for ever $1 retained.
Snap-on had a strong finish to 2022, exceeding both expectations and the previous year's figures by posting earnings of $4.42 per share and a 4.2% increase in sales, and that finish continued with strong first quarter 2023 results. First quarter earnings per share was up again, beating estimates by $0.49 at $4.60 on revenue of $1.18 billion, which was up 7.8% year over year. The revenue beat by $50 million thanks to a 10% bump in organic sales.
Barring some Artificial Intelligence breakthrough from competitors, these results have a strong likelihood of continuing as noted by Chairman and CEO Nicholas Pinchuk:
"The results for the fourth quarter serve as more testimony to that fact, and they are an unmistakable demonstration of our continuing momentum. [...] Going forward, we believe we'll keep moving down our runways for growth, our wide runways for growth. [...] Our resilient markets do represent a significant opportunity, and we are there to take advantage up close and personal, like no one else, right where the jobs are done."
One of those runways is in the highly resilient automotive market:
"The average age of vehicles continue to increase. The complexity of repairs is rising steeply as new platforms enter the vehicle park, and enter they have, starting in dealerships. And we have seen a resurgence in dealership projects despite a still recovering supply chain. Changes in internal combustion, the rise of electric vehicles and the expansion of vehicle autonomy have made dealerships eager for new equipment to support complex repair test of the evolving vehicle park."
Based on this optimism coupled with Snap-on's historical trend of meeting and exceeding expectations, I find it easy to anticipate continued growth as the company expands its professional customer base beyond automotive repair into adjacent markets and geographies.
Priced near fair value
With its forward price-earnings ratio of 15 trading just shy of its five-year average price-earnings ratio, the share price doesn’t scream bargain basement. However, based on its current level of profitability, the company is likely to create at least $10 billion in net income over the next decade. That should translate into a minimum of $6.8 billion in retained earnings, which based on the last decade could easily mean adding another $13.6 billion in market value. I'd be shocked if earnings weren't much higher in 2033.
It is also important to note that Snap-on's current quarterly dividend is greater than what was paid out just a decade ago. The dividend yield is now 2.32%. Given another 10 years with a similar growth outcome, today's investors could someday be earning roughly 10% a year just in dividends. With a solid financial position, including more than $800 million in cash and just over $1 billion in total debt, Snap-on looks poised for continued success.
