In the spring of 2022, I believed it was time to snap a position in the case of Snap-on Incorporated (NYSE:SNA). Shares were trading rather stagnant at the time, while the company has seen continued growth, reducing expectations along the way, all while the state of the balance sheet has improved a great deal already.
All of this looked quite compelling, with the valuation, track record and long-term positioning being compelling enough to hold a position. As it turned out, shares have delivered on solid returns in the near two-year period ever since, backed up by further earnings growth and balance sheet strengthening, which makes shares look attractively valued today, even near their highs.
Snap-on is a tools business, including its namesake tools group, which are used in vehicle repairs, repair systems and information. These are used in vehicle repair shops, but also in other commercial and industrial groups. With cars getting older and more complex, demand for hand tools, diagnostics tools, and power tools is on the rise, although Snap-on has delivered just about GDP-like growth for most of the 2010s.
Its track record is very strong, however, with dividends having been paid out in an uninterrupted fashion since 1939, driven by the firms’ focus on precision, performance, and pride.
The company has seen modest growth in the business during the 2010s, yet shares have seen huge gains, as a $40 stock in 2010 has quadrupled to $160 in 2015, and after witnessing some volatility during the period around the pandemic, shares were trading rather stagnant in the lower $200s early in 2022.
This valuation was based on a firm which reported $4.6 billion in sales in 2021, mostly generated from product sales and to a smaller degree financial revenues as well. Net earnings rose to $820 million, with earnings reported at $15 per share, and net debt being very modest at just over $400 million. With such earnings power, the company has been trading at just 13-14 times earnings, while the balance sheet has improved quite a bit, making the valuation look a lot more compelling.
This was a rather non-demanding valuation, as some investors arguably were fearful that Snap-on has not seen sufficient growth, or perhaps that fewer tools will be needed following the electrification of the car fleet, although the counterargument could be made as well. Given the earnings yield and a strong dividend yield of 3% (at the time) but more so its strong track record, I initiated a position with an expectation of reasonable returns in the medium term.
Since the spring of 2022, Snap-on has struggled, but shares have recovered in 2023, with shares peaking at nearly $300 in the summer of 2023, now trading at $288 per share.
In February 2023, Snap-on posted resilient 2022 results, with revenues having grown from $4.25 billion in 2021 to $4.49 billion in 2022. These are the product sales, with financial service revenues being flat at $350 million. Amidst strong cost control, operating profits rose from $1.09 billion to $1.20 billion, with net earnings of $912 million coming in at $16.82 per share.
By now, the business reports its results across three segments (excluding the financial services group). The largest of these is the namesake Snap-on Tools Group, responsible for about 40% of sales. This is complemented by the Repair Systems & Information Group, which is responsible for about a third of sales, and the Commercial & Industrial Group, making up just over a quarter of revenues.
The company started 2023 on a very strong note with organic growth surpassing 10%, with organic growth slowing down to levels around 5% in the second and third quarter. Through the third quarter, revenues are some $200 million ahead of last year, making a $4.75 billion number likely for the year, that is excluding the financial service group revenues. With earnings of $14.00 per share coming about one and a half dollars ahead of last year, earnings might actually come in around $19 per share this year.
Net debt has come down to less than a quarter of a billion, and this even excludes a substantial net receivable position from the financing portfolio, meaning that the company seems quite under-leveraged.
Given the strong margin performance, it is understandable why shares of Snap-on have seen decent gains, now trading at $288. Based on estimated earnings power around $19 per share, valuations are non-demanding at 15 times earnings. It should, of course, be said that this has been achieved in a high-margin environment, yet the balance sheet has been strengthened significantly.
This strong financial footing triggered the company into announcing a convincing 15% increase in the quarterly dividend, with quarterly payouts now amounting to $1.86 per share, boosting the dividend yield to about 2.5%.
In November, the company furthermore announced a bolt-on acquisition. The company reached a deal to acquire California-based Mountz in a deal set to add $40 million in annual sales, adding just less than 1% to pro forma sales. No purchase price details have been announced, but likely the purchase price runs in the tens of millions of dollars, perhaps around a hundred million dollars, as upcoming cash flow statements might reveal the price being paid.
While shares have seen a decent 35-40% gain over a time span of less than two years, multiples remain rather non-demanding, while the balance sheet has been improved further. This makes me still quite upbeat on Snap-on Incorporated shares, although I am not chasing the shares to add to my existing long position here.