Organic Growth At Snap-On Has Slowed

Summary

• Snap-on has seen solid results over the last five years.
• But the company's organic sales growth has been declining every year.
• The company is trading at a good multiple and offers a good dividend.

Introduction

Snap-on Inc. (SNA) is a global innovator and marketer of tools, equipment, diagnostics, system solutions, and more. The company sells everything from tools, tool storage, and shop equipment to diagnostics software, and industry solutions. The business has performed well over the past five years but has seen lower growth in organic sales recently. This being said the business has a great balance sheet, a stable product, and a nice dividend yield. 

Financials

Source: SEC 10-K's

Snap-on has seen revenues grow at a clip of 2.16% per year while net income has grown at a rate of 7.87%. As can be seen gross margins have stay very steady at 49% and operating margins have increased to almost 26%. This shows that the company has been very consistent at controlling cost of manufacturing and lowered the cost of doing business. Much of the increase in operating margin has been from the increased revenue from the financing of products. The operating profit before financial services grew 3.34% per year on a margin on average of 21%, but operating profit from financial services grew 7.64% on an average margin of 71%.

Source: SEC 10-K's

Powering the revenue growth over the past five years has been positive organic sales growth. This organic growth has been significantly softer since 2018 slowing from mid single digits to low single digits. Since 2017 Snap-on has acquired 7 companies but this has not helped increase total revenue as sales only increased 1.46% form 2017-2018 and decreased -0.29% from 2018-2019. 

Segment Breakdown

Source: SEC 10-K's

the Snap-on tools segment makes up 43.2% of total sales and is the main revenue source but has seen small declines in sales since 2017. As can be seen organic growth in the tools segment has been very soft. Despite this the other three segment have been strong growers. Repair Systems & Information saw the great overall sales growth of the segments with very strong organic growth up until 2018. Commercial & Industrial was also a strong growth segment and has had very consistent mid single digit organic sales. The real star has been the financial services segment which saw double digit growth early on. Obviously, the financial services revenue can only continue to grow if products of other segments are in demand.  

Financial Standing

As of most recent quarter Snap-on has a current ratio of 3.34x and a quick ratio of 2.40x, which shows the strong liquidity of the business. In fact, the company has a working capital balance of $1.943 Billion. The company also isn't highly leveraged with a debt to equity of 0.74x. To go with this the profitability metrics are great with a 10 year average ROA and ROIC of 9.88% and 14.43%, respectively. 

Valuation 

But the final question is what an investor is to pay for Snap-on and is it worth the asking price. At a share price of $148 Snap-on is trading at a P/E of 11.93x 2019 EPS of $12.41. With a soft 2020 and using a conservative $8.00 EPS for the year the company is trading at 18.5x. Looking at the book value per share of $63.95 and net tangible assets per share of $90.18 Snap-on is trading at 2.31x and 1.64x. The company also offers a dividend yield close to 3%.

Conclusion

Snap-on over the past five years saw some solid results. The business grew at great rates with very good organic sales up until 2018. With that being said total sales have leveled off along with organic sales but the company has increased acquisitions. While I do not expect the same growth going forward, I do believe the company's products have stable demand. On top of that the balance sheet for the company is wonderful lined with strong liquidity and leverage. As of right now Snap-on is trading at around 12x last years earnings and offers a 3% dividend, therefore I may buy in on a dip that allows for a cushion of safety.