Snap-On, Inc. (SNA) has been on the receiving end of negative news recently. Investors are talking about shorting it, the annual average share price has been mostly flat for years since economic indicators have shown weakness, and unfavorable currency translations have caused sales to decline. All of this pessimism has many investors shying away from SNA.
But this article will show you that when you dig deeper into the fundamentals of this company, you will see that Snap-On has been a dependable and consistent company that seems to be doing just about everything right. Additionally, it’s returning value back to shareholders. On the contrary of being shorted, this is a stock that a long-term investor could count on as a stable workhorse for the duration.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 87/100. Therefore, Snap-On is considered to be a good company to invest in, since 70 is the lowest good company score. SNA has high scores for ROE, 10 Year Price Per Share, Earnings per share, Ability to Recover from a Market Crash or Downturn, ROIC, and Gross Margin Percent. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past 5 years. In summary, these findings show us that SNA seems to have above-average fundamentals since the majority of categories produce good scores.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
(Source: BTMA Stock Analyzer)
Let’s examine the price per share history first. In the chart below, we can see that price per share has been mostly consistent at increasing over the first 5 years of the chart but has been mostly stagnant during the past 4 years. Overall, share price average has grown by about 249.8 over the past 10 years or a Compound Annual Growth Rate of 14.9%. This is a nice annual return, which many investors would likely feel satisfied with.
(Source: BTMA Stock Analyzer – Price Per Share History)
Looking closer at earnings history, we see that earnings have grown consistently over the past 10 years. The consistent earnings growth of this chart is almost an ideal situation for investors.
Consistent earnings make it easier to accurately estimate the future growth and value of the company. So, in this regard, SNA is a good candidate of a stock to accurately estimate future growth or current value.
(Source: BTMA Stock Analyzer – EPS History)
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
The return on equity has been high and consistently increasing besides 2017 where ROE fell slightly. Five-year average ROE is good at around 21%. For return on equity (ROE), I look for a 5-year average of 16% or more. So, SNA easily meets my requirements.
(Source: BTMA Stock Analyzer – ROE History)
Let’s compare the ROE of this company to its industry. The average ROE of 48 Construction supplies companies is 22.27%.
Therefore, Snap-On‘s 5-year average of 20.9% and current ROE of 22.4% are within the normal range for this industry.
Return on Invested Capital
The return on invested capital has been increasing somewhat consistently except for 2017 where ROIC declined. Five-year average ROIC is average at around 16%. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So, SNA meets my requirements.
(Source: BTMA Stock Analyzer – Return on Invested Capital History)
Gross Margin Percent
The gross margin percent (GMP) has been mostly stable and increasing over the last five years, besides 2017 when GMP dropped. Five-year GMP is solid at around 51%. I typically look for companies with gross margin percent consistently above 30%. So, SNA has proven that it has the ability to maintain acceptable margins over a long period.
(Source: BTMA Stock Analyzer – Gross Margin Percent History)
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.
SNA’s Current Ratio of 2.33 is good, indicating that it has a good ability to use its assets to pay its short-term debt. Ideally, we’d want to see a Current Ratio of more than 1, so SNA exceeds this amount.
According to the balance sheet, the company seems to be in good financial health. In the long term, the company is solid in regards to its debt-to-equity. In the short term, the company’s financial situation seems healthy.
The Price-Earnings Ratio of 13.2 indicates that SNA might be selling at a low price when comparing SNA’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of SNA has typically been between 16.9 and 17.4, so this indicates that SNA could be currently trading at a low price when comparing to SNA’s average historical PE Ratio range.
SNA currently pays a dividend of 2.35% (or 2.30% over the last 12 months).
(Source: BTMA Stock Analyzer – Misc. Fundamentals)
The Story Behind The Dividend
In regards to dividend history, I’m first interested in knowing if the payout ratio is sustainable. At this time, it’s around 30%, which means that there is still room to grow the dividend. Also, notice that SNA has a regular history of buying back shares, which contributes to higher payout ratios.
If we look only at the dividend yield, we see a range of 1.28% to 2.36%. This stock pays out a decent dividend. Dividend yields have increased somewhat consistently over the 5-year period. Therefore, this stock may be desirable for some dividend investors.
Although SNA participates in share buybacks, sometimes buybacks don’t make sense, as according to Warren Buffett:
“There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds – cash plus sensible borrowing capacity – beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”
In the example of SNA, the company appears to have ample equity as indicated by its satisfactory debt-to-equity ratio. Now, let’s consider its borrowing capacity.
I couldn’t find any information providing evidence that SNA doesn’t have sensible borrowing capacity. As stated by Snap-On’s 2018 annual report:
“Snap-on believes that its cash from operations and collections of finance receivables, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for scheduled debt repayments, payments of interest and dividends, new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise.”
Now, to see if the buyback timing made sense. From the view of a share price chart over the past 5 years, the worst times to do share buybacks would have been when SNA was climbing highest in stock price. This would have been around 2013-2015. If we look at the dividend chart above, we can see that during these times of increased share price growth was a time when SNA was buying back less shares, which would make sense. Then, when share price started to become stagnant from 2015 onward, SNA was buying back more stock. This would also make sense to effectively buyback shares at opportune times. Therefore, it seems like SNA has bought back shares with some strategic plan.
If I were currently interested in buying SNA now for the dividend, I would be trying to buy when the dividend yield was highest relative to its past. From the chart below, we can see that the dividend yield is near a somewhat low point relative to the past 10 years. Therefore, it’s not an ideal time to buy now if my priority is a better than average return through dividends.
Overall, the dividend situation with SNA is better than average. On the positive side, the stock pays a decent and consistent dividend. The dividend yield has been increasing mostly consistently over the years. Snap-On also aims to regularly return value back to shareholders through buybacks, and these buybacks seem to be made according to some strategic plan to help return value to shareholders. Finally, there is still plenty of room to grow the dividend.
On the negative side, the dividend yield is at a somewhat low point when compared to the last 10-year history.
This analysis wouldn’t be complete without considering the value of the company vs. share price.
Value Vs. Price
For valuation purposes, I will be using a conservative diluted EPS of 11.87. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
(Source: Wealth Builders Club)
According to this valuation analysis, SNA is undervalued.
- If SNA continues with a growth average similar to its past 10 years’ earnings growth, then the stock is undervalued at this time.
- If SNA continues with a growth average similar to its past 5 years’ earnings growth, then the stock is undervalued at this time.
- If SNA continues with a growth average similar to its past 10 years’ book value growth, then the stock is undervalued at this time.
- If SNA continues with a growth average similar to its past 5 years’ book value growth, then the stock is undervalued at this time.
- If SNA continues with a growth average similar to its past 5 years’ total equity growth, then the stock is undervalued at this time.
- According to SNA’s typical PE ratio relation to the S&P 500’s PE Ratio, SNA is undervalued.
- If SNA continues with a growth average as forecasted by analysts, then the stock is about fairly priced.
This analysis shows an average valuation of around $194 per share versus its current price of about $155. This would indicate that Snap-On, Inc. is undervalued.
According to the facts, Snap-On, Inc. is financially healthy in a long-term sense in having enough equity as compared with debt and in the short term because the current ratio indicates that it has enough cash to cover current liabilities.
Other fundamentals are solid, including ROE, ROIC, GPM, and EPS.
The dividend situation is better than average as the company pays a moderate dividend with a yield that has been steadily increasing over the past 5 years.
Lastly, this analysis shows that the stock is undervalued.
Another pro is that this stock has typically performed better than the market following downturns and recessions. This is probably because businesses and professionals rely on Snap-On’s products to maintain business operations. Below, we can see how SNA performed against the S&P 500 during the economic crisis of 2008 and years onward. You can see that SNA reacted similar to the market during the onset of the recession, but in years following, SNA grew at a much faster rate than the market.
This pie chart below shows how Snap-On’s revenue is diversified to add additional stability.
“Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 8.39%. This year, analysts are forecasting earnings increase of 4.19% over last year. Analysts expect earnings growth next year of 5.42% over this year’s forecasted earnings.” (Source: Forecast Earnings Growth)
If you invest today, with analysts’ forecasts, you might expect about 8.39% growth per year. Plus, we’ll add the current 2.35% forward dividend. This brings the annual return to around 10.74%.
Here is an alternative scenario based on SNA’s past earnings growth. During the past 10 and 5-year periods, the average EPS growth rate was about 17.7% and 10.7%, respectively. Plus, the average 5-year dividend yield was about 2.30%. So, we’re at a total return of 20% to 13%.
But when considering cash flow growth over the past 10 and 5 years, the growth has been 7.7% and 13.3%, respectively. Plus, the average 5-year dividend yield would give us a total return of 10% to 15.6%. Therefore, according to an average of these returns, our estimated annual return could likely be around 12-13%.
If considering actual past results of Snap-On, which includes affected share prices, and long-term dividend yields, the story is a bit different. Here are the actual 10 and 5-year return results.
10 Year Return Results if Invested in SNA:
Initial Investment Date: 7/26/2009
End Date: 7/26/2019
Cost per Share: $33.32
End Date Price: $155.33
Total Dividends Received: $20.95
Total Return: 429.05%
Compound Annualized Growth Rate: 18%
5 Year Return Results if Invested in SNA:
Initial Investment Date: 7/26/2014
End Date: 7/26/2019
Cost per Share: $124.67
End Date Price: $155.33
Total Dividends Received: $13.97
Total Return: 35.80%
Compound Annualized Growth Rate: 6%
From these scenarios, we have produced results from 18% to 6%. I feel that if you’re a long-term patient investor and believer in SNA, and its existing products, you could expect SNA to provide you with around at least 8% annual return and up to about 13% if you’re willing to wait for a more opportune time to sell. For the short-term swing trader or impatient investor, SNA also provides an opportunity to buy this solid company at a discount and to take advantage of the regular up and down price swings that this stock experiences.
As a comparison, the S&P 500’s average return from 1928 – 2014 is about 10%. So, in a typical scenario with SNA, you could expect to earn a lower short-term return result as compared with an S&P 500 index fund. But in the long run, this company has proven that it is able to outperform the benchmark of the average S&P 500 index fund return.
For me, the choice is certain. I would take an objective look at this company and realize that Snap-On is a chance to own a solid company keeping good long-term fundamentals with loyal customers, serious professionals, and business owners that depend on its tools and devices to maintain critical business operations. The forecasted returns for the near future may be less than shareholders have experienced in the past, but many shareholders would rather own a solid and consistent earning company rather than a potentially higher returning company that could boom or bust unexpectedly.
I think that this quote by Warren Buffett is fitting for the current Snap-On situation: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
To add icing on the cake, Snap-On not only appears to be a wonderful company, but according to my valuation analysis, it’s also selling at a bargain price.
If you want to find good companies at bargain prices that will provide you with long-term returns and dividends or monthly swing trade profits, then my Seeking Alpha Marketplace service (Good Stocks@Bargain Prices) is a good match for you. I combine the proven methods of Warren Buffett’s and Benjamin Graham’s value investing with a practical system to apply these methods into today’s market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.