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Can Growth Initiatives Aid Snap-on (SNA) Despite Sales Woes?

Zacks Equity Research

Snap-on Inc. SNA has been performing well lately, which is evident from 3.5% rise in the stock price in the past month. This growth stemmed from continued optimism on its robust business model and focus on value-creation processes. Further, the company’s RCI program, designed to enhance organizational effectiveness and minimize costs, has been driving margins and profitability, which is attracting investors.

However, this Zacks Rank #3 (Hold) stock has witnessed a snag in the past three months, owing to lower-than-expected sales and soft trends in the Tools Group segment in first-quarter 2019. Sales continue to be impacted by adverse currency rates while Tools Group is witnessing a decline in international operations sales. Clearly, the stock has risen 2.8% in the past three months, underperforming the industry’s growth of 6%.

 



Nonetheless, there are more positive factors that can cushion the performance of the Snap-on stock despite the aforementioned deterrents. Let’s get a detailed view of factors that may aid the stock’s growth moving ahead.

Growth Strategies Bode Well

Snap-on’s robust business model helps in enhancing the value-creation processes, which in turn improves safety, quality of service, customer satisfaction and innovation. In fact, the company’s growth strategy focuses on three critical areas, namely enhancing the franchise network, improving relationship with repair shop owners and managers, and expanding critical industries in emerging markets.

Furthermore, Snap-on is dedicated to various strategic principles and processes aimed at creating value in areas like Rapid Continuous Improvement (RCI). The RCI process is designed to enhance organizational effectiveness and minimize costs besides helping the company to boost sales and margins, and generate savings. Savings from the RCI initiative reflect gains from continuous productivity and process improvement plans. Moreover, management intends to boost customer services along with enhancing manufacturing and supply-chain capabilities through RCI initiatives and further investments. Savings from RCI initiatives mainly drove gross margin in the first quarter.

This apart, Snap-on’s major strength includes its ability to innovate, which has been contributing to sales growth over the past few quarters. The company has been investing in new products and increasing brand awareness across the world as well. Accordingly, it has launched several products across its businesses over the past few quarters, which are aiding the quarterly results.

Financial Strength Looks Good

Snap-on boasts a healthy balance sheet that offers it the financial flexibility to enhance shareholder returns and drive development through value-added investments aimed at accelerating growth. Further, the company’s commitment toward enhancing shareholder value is evident from its constant dividend payments and share repurchase programs. At the end of first-quarter 2019, Snap-on had cash and cash equivalents of $156.2 million compared with $140.5 million at the end of 2017. In the first quarter, the company distributed cash dividends of $52.8 million along with REIT repurchases of 295,000 shares for $47.4 million.

In 2018, it bought back 1.769 million shares for about $284.1 million. At the end of the first quarter, the company had about an additional $476.9 million remaining to be repurchased under its existing authorization.

Robust Earnings Trend & Outlook

Snap-on boasts an impressive earnings surprise history, having outpaced estimates in nine of the trailing 10 quarters. The company also delivered solid earnings in first-quarter 2019, which improved year over year, owing to its robust business model and focus on value-creation processes.  Increases in adjusted operating earnings and improved sales in the U.S. franchise operations further aided the bottom-line performance.

Management expects these positives to continue in 2019. The company anticipates making progress on defined strategies for growth in 2019, which should boost its bottom line. It expects to leverage capabilities in the automotive repair area beside strengthening the overall professional customer base. Apart from automotive repair, Snap-on expects to add customers from adjacent markets, newer geographies and other areas like critical industries.

Conclusion

A detailed review of the company’s growth strategies suggests that the stock is definitely poised to regain traction in the future. This view is further supported by our VGM Score of B and a long-term earnings growth rate of 8.4%. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best investment opportunities.

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G-III Apparel Group GIII has a long-term earnings growth rate of 15% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Toro Company TTC delivered positive earnings surprise of 2% in the last reported quarter. It currently carries a Zacks Rank #2.

Under Armour UAA has a long-term earnings growth rate of 20.8% and a Zacks Rank #2 at present.

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