Buy Used, Save Money
It's no secret that an easy way to save money is by buying a used car rather than one that is brand new. Why pay full price on an automobile that will lose 20% or more of its value in a few seconds as you leave the dealership? Your down payment is paying for your drive home - and that's it. The same basic savings rule applies for companies when they look to buy new machinery.
Because of the slowing growth of the economy, companies will be looking to get every last ounce of use out of their expensive machinery. If they can use it for longer, it lowers their depreciation expense as well, which is a popular way to boost reported net income.
Unfortunately for companies in the industrial sector, a slowing economy means less sales for all sorts of machinery, especially farming and construction. Some of the biggest industrial equipment names in the world - John Deere (NYSE:DE) and Caterpillar (NYSE:CAT) - have taken severe hits on their top and bottom lines, a trend that is not expected to change any time soon.
Longer Life = More Repairs
A drop in sales is a screaming indicator that companies using this machinery are prolonging the "useful life" of it, and that when they do need to replace it, they are looking for good deals on used equipment rather than buying the latest and greatest.
And this does not just apply to large industrial companies. In the case of a recession, when people are laid off, the sensible ones will not want to go out and buy a new car (unless maybe to downsize). They will hold on to their current car(s) until they stop turning on.
The increased lifespan of all of this equipment means increased wear and tear. Companies will have to make sure they are keeping up with maintenance; this means that instead of putting their money into new equipment, they will be putting it into quality tools to fix damage and maintain upkeep. I think that the best way to take advantage of this developing trend is by investing in Snap-On (NYSE:SNA).
Snap-On is a global manufacturer of tool, diagnostic, service and equipment solutions, with a diverse product mix that fits just about every type of industrial equipment possible. In fact, it's probably more difficult to find a machine that they can't fix: their customers include companies in sectors such as aviation, agricultural, construction, mining, military, power generation, and many more.
Room for Growth
Snap-On has proven that they make reliable, innovative products, as they were voted the preferred brand for several key automotive repair categories.
As the technology of automobiles continues to rapidly advance, it will benefit them greatly to have such a positive reputation. If they can continue to adapt to the new technologies, their overall growth will come easily. Through their reputation, they should be able to sign deals with new, upcoming automotive manufacturers as well as acquire smaller businesses of similar operations and continuing to expand their continuous search for new deals with more established prospects.
Building off of the prediction that more companies will continue to hold their equipment for longer time periods, or simply buy used equipment to replace that which is broken or outdated, Snap-On can also expect to see some organic growth through increased demand for services. They have gigantic geographical coverage, more than 130 countries, in which they are relied on every day by thousands of clients. Their brand loyalty is certainly established, and it is highly probable that existing clients will look to them for solutions in repairs and diagnostic tests for future technologies.
Over the past three years, Snap-On has shown very stable growth in revenues and net income, which are up 5% and 16%, respectively. This again demonstrates the passion that they show for always continuing their search for new and innovative ideas to serve a rapidly changing industry. Other competitors, such as Illinois Tool Works and Black and Decker, have seen low single digit to negative growth in the same time period. That upward trend is expected to continue, as their two year projections for revenue and net income growth are about 5% and 11%, respectively.
In the first quarter of 2016, product sales and operating earnings for two of the company's three main segments rose. Keep in mind that earnings overall for the first quarter was profoundly negative for many companies in the USA, especially in the industrials sector. This proves that Snap-On is able to find sources of growth even in difficult economic situations, and capitalize on their reputation and increasing demand for reparation services.
Lastly, Snap-On has a very safe amount of debt. While companies such as John Deere, Caterpillar, and Illinois Tool Works' (NYSE:ITW) capital structures are greater than 50% debtClick to enlarge, Snap-On has a Total Debt/Capital ratio of only 26%. In a risky economic environment, it should always be a priority when scoping out investment opportunities to look for companies with low debt levels, as the risk of being unable to pay off long term debt becomes significantly higher.
As the global economy enters its impending contractionary period, look for Snap-On to thrive. The fact that they were still able to grow in a rough 1st quarter environment suggests that they have a very good and reliable business, as well as a loyal and extensive customer base. More and more companies and individuals are going to strain the lives of their automobiles and industrial equipment - they would be foolish not to - which will lead to heavy future demand for Snap-On, which means higher performance and higher investor confidence and praise.
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.