Summary:
Keeping its winning streak alive, Snap-on beat earnings in first-quarter 2016 as well.
Quarterly earnings benefited from higher operating earnings before financial services
as well as lower operating expenses. Going forward, we believe Snap-On’s robust
“Value Creation Processes”, including strategic value-creation processes like rapid
continuous improvement, are likely to accelerate its growth momentum. Moreover, the
company’s ability to steadily introduce innovative products lends it a competitive edge
over peers. Solid traction of recently introduced products, namely, Snap-on 312 CF
heavy-duty diagonal cutters, VERUS Edgeand V3300 wheel aligner are expected to
support the company’s top-line growth. Also, thriving prospects across all four
business segments continue to add to its strength. However, sluggish oil market
activities and high currency fluctuation risks raise concerns.
Reasons To Buy:
- Snap-on’s robust business model helps enhance the value-creation processes, which, in turn, drive safety, quality of service, customer satisfaction and innovation. Also, the company is dedicated towards various strategic principles and processes aimed at creating value in areas like rapid continuous improvement (RCI). The RCI process, which is designed to improve organizational effectiveness and lower costs, including working capital requirements, has helped improve sales, margins and savings for the company. As a result, asset utilization has improved by rationalizing production through plant closures, and working capital has been used more effectively. Part of the Rapid Continuous Improvement process is the transformation of Snap-on’s global manufacturing and supply chain into a market-demand-based, lower-cost replenishment system. Through a structured approach of supply chain and franchise improvement initiatives, order-fill rates are improving and profitability is increasing across most operating segments. The company continues to invest in its planned growth schemes, including further expansion of its manufacturing capacity in emerging nations of the Asia Pacific region. During first-quarter 2016, Snap-On’s value creation process contributed to the 18.6% increase in operating margin and 15.5% growth in EPS.
- The biggest advantage of Snap-on is its ability to innovate, which it has been maintaining over the last nine decades. The company has been investing in new products and increasing brand awareness across the world. In particular, the company has been working towards spreading its footprint “beyond the garage” and offering advanced exclusive solutions for professionals performing critical tasks. Accordingly, Snap-on launched a number of products across its segments in the reported quarter. Under the Commercial & Industrial Group segment, the company launched three-quarter inch flank drive 12 point impact socket that is expected to be deployed extensively by power generation, mining and oil and gas sectors. This segment also launched the Snap-on 5S Dual Visual Control Cabinet. The Tools group continued its product launch spree with the introduction of Snap-on 312 CF heavy-duty diagonal cutters with cushion grips and the low-profile swivel impact socket set, considering the surging demand for high-performance tools. Also, the Repair Systems & Information segment launched touchscreen diagnostic workstation, VERUS Edge and V3300 wheel aligner. Such new offerings are poised to benefit Snap-on in the forthcoming quarters.
- Snap-on is witnessing encouraging prospects in most of its business lines that signals toward brighter prospects going forward. Moreover, the company’s broad product line adds to its strength. Snap-on’s Repair Systems & Information segment has been gaining traction on the back of factors like rising penetration in emerging markets, continued software and hardware upgrades, productivity enhancements. In this segment, undercar equipment is an important, high visibility and high-value product line for the company and has been major revenue driver since the past quarters. It allows Snap-on to clearly showcase its advantage in innovation, thus helping the company to improve its position in Asia Pacific. Going forward, the company believes that Repair Systems & Information group’s business deals with independent repair shop owners and managers will likely emerge as a major growth driver in the long run. The company believes growing complexities of new vehicles and aging fleet, not only in the United States but worldwide, holds tremendous potential for the company. Additionally, Snap-on’s financial services portfolio has grown steadily in the past few years, thus supporting its financials.
- Snap-on’s financial services portfolio has grown steadily in the past few years aided by offerings like financing for new finance and contract receivables. At the end of fourth-quarter 2015, the company’s balance sheet comprised of about $1.6 billion of gross financing receivables, which includes $1.4 billion garnered from its U.S. Snap-on credit operation. Notably, around 80% of Snapon’s U.S. financing portfolio consists of credit loan extensions to technicians. In the quarter under review, the company’s worldwide finance portfolio upped about $62 million. Apart from this, Snap-on is dedicated towards rewarding shareholders from time to time via dividend payments and stock buyouts. In first-quarter 2016, the company paid dividends of $35.4 million and repurchased 157,000 shares for $23.1 million. This strategy of rewarding shareholders regularly increases investors’ confidence in the stock.
Risks:
- Snap-on has strong presence in the international market and derived considerable part of its revenues outside U.S. Thus, the company is exposed to high risks related to currency fluctuations, especially due to strengthening of U.S. Dollar, and macroeconomic turbulences. Unfavorable economic conditions may lead to reduced consumer and investor confidence, instability in the credit and financial markets and lower business & consumer spending. In the reported quarter, unfavorable foreign currency translations reduced sales at Commercial & Industrial Group by $6.7 million and Repair Systems & Information by $4.5 million. Around one-third of the company’s revenues are derived from its European businesses, which continue to be impacted by weakness in Eastern Europe, particularly Russia, and some parts of Asia-Pacific region, thereby providing limited visibility regarding the company’s future performance. This apart, Snap-On, being a multinational company, is subject to increasing legislative and regulatory practices as well as compliance burdens, especially related to its government, military and defense contractor customers. This poses a major headwind before future growth. For example, the Affordable Care Act (the “ACA”), which continues to be phased in, can significantly impact provision of both health care services and benefits in the U.S., thereby raising concerns for Snap-On.
- Despite long-term growth potential some of Snap-on’s business lines are suffering on account of difficult macroeconomic conditions. For instance, the company’s military business depends largely on federal decisions and other external factors. Political issues like the recent budgetary impasse in the U.S., government shutdown and sequestration can be highly taxing for the company’s business going forward. Also, sluggish oil and gas market activity continue to negatively impact Snap-on’s revenues from industrial market. In the reported quarter, the company’s Commercial & Industrial Group segment’s performance was partially offset by weak U.S. military volume and volatility in oil and gas markets. The ongoing softness in industrial markets are impacting client spending which in turn is adding to the company’s woes, primarily impacting its industrial business. Also, the company’s aerospace project is facing some weakness in the Middle East region.
