Snap-On Tools: A Class Act

| About: Snap-on, Inc. (SNA)
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I spent my twenties working on diesel trucks. It was a few years after the invention of the wheel. While the shop where I worked supplied the mechanics with some specialty tools, it was up to us to have the basics. Most of my tools were Craftsman, a sturdy tool with a lifetime guarantee. There was nothing wrong with a Craftsman, nothing that is, until the Snap-on (NYSE:SNA) truck made its weekly appearance.

Unlike some of my colleagues, I didn't have the means to purchase many Snap-on tools. I drooled over them, but didn't buy unless I had the money. I remember there being an unwritten law in our shop. You didn't borrow a Snap-on from another technician. It just wasn't done.

Snap-on tools are esthetically pleasing and fit the hand well. The fact that these tools make the job easier for the person using them is a testament to the engineering that went into them. They're not cheap, nor should they be. Let's open the Snap-on Company tool box and take a peek inside.

Snap-on Tool was founded in 1920 by a couple of fellows named Joseph Johnson and William Seidmann. They made 10 sockets that 'snapped on' to 5 interchangeable wrenches. To market their product, they enlisted the services of one Stanton Palmer. Palmer would take the tools to where the potential customers worked and show them how well the tools performed. Bingo! Business grew and so did Palmer's workload. Another man by the name of Newton Tarble was brought in to help. These four amigos got Snap-on off the ground. Four guys, a simple idea, a ton of grit, and look what happened. Today Snap-on is a $2.8 billion company.

In 1930s Snap-on went international. Also, about the same time, the company began offering credit to its customers. An industry first.

In 1939, Snap-on began giving money back to its investors.

In the 1950s, delivery vans made their debut. These vans were the forerunners of the one I mentioned earlier. The drivers of today's vans are franchisees. They've got skin in the game and it shows. They see their customers weekly. A relationship soon forms between these folks and their customers. That relationship sells a lot of tools. I've seen it and experienced it. It's a one on one, face to face, first name basis situation that really works.

Today, Snap-on has four business segments.

First is the Snap-on Tool Corporation. This consists of some 4,800 trucks and the franchisees.

Second is the Repair Systems and Information Group. This segment provides tools and equipment to dealerships and independent repair shops. This might include anything from lifts to welders; from air compressors to air conditioner tools. It might be that high-tech diagnostic unit they hook up to your car; that wonderful device that finds the problem so the technician can remedy it. That mysterious and exalted extinguisher of that irritating little "Check Engine" light. Nearly anything a modern shop needs to function can be supplied by this group.

Third, is the Commercial and Industrial Group. This group supplies tools, equipment products, and a broad range of productivity solutions for professionals in sundry industries. Aviation, mining, agriculture, aerospace and the military are just a few of the areas this group serves. Snap-on, through the utilization of mobile technology labs, can go to the customer whether it's in the hangar, at the plant, or on the assembly line, and provide solutions and repairs.

Financing is the last segment and is involved primarily in helping new franchisees begin their Snap-on careers.

Here are a few numbers you might be interested in.

$10,000 invested in Snap-on 10 years ago has grown to over $18,000.

The dividend yield is a sedate 1.92%.

The dividend payout ratio is 27%. I know, I'm thinking the same thing.

Over the last 10 years, Snap-on has delivered a compound annual growth rate in revenues of 3.6%, with a whopping 28.4% growth rate in earnings per share during the same period. These folks squeeze pennies until they beg for mercy.

Over the last decade, Snap-on has never been levered more that 35%.

The current ratio is 2 to 1.

Snap-on has a presence in 130 countries around the world.

The company's products reach technicians that service 40% of the world's vehicles.

About 41% of the company's revenue comes from outside the United States.

The price earnings ratio is 15.

Things haven't been all peaches and cream for Snap-on. Sales fell 7% in their commercial and industrial division this last quarter. The decline was due to a slowing European economy and military belt-tightening. Quarterly profit, however, was up 14%, due to a 10% increase in tool sales. Also, annual sales and profit numbers beat estimates.

Snap-on is an established company, moderately leveraged, with promising growth prospects outside the United States. Automobiles will defy credulity and grow more complex. The tools to diagnose and repair them will become more sophisticated. The demand for cars from the burgeoning middle classes of countries such as China and India is only going to strengthen. The dealers that sell these cars will have to be equipped to repair them.

Here are a few parting facts to consider before you do your homework. Snap-on tools are expensive and that will drive many younger technicians to a cheaper brand. That's a certainty. As the technician ages, however there's a good chance he or she will start replacing old tools with Snap-ons, or retool completely with the brand. I saw this happen repeatedly when I was in the business. The reason most given for the switch? "I'm going to be in this occupation for the rest of my life. I'm going to have the best." The best. That about sums it up.

Disclosure: I am long SNA. 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.