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I'm sure it wasn't the way the company wanted to start its 100th anniversary year, but just a few weeks into 2020, its share price began to collapse:
The company is Snap-on Inc.(NYSE:SNA). In its fourth-quarter 2019 earnings report, issued on Feb. 6, Chairman and CEO Nick Pinchuk explained there were "ongoing headwinds from unfavorable currency and economic challenges in certain geographies throughout the year" that were impacting its performance.
Just a few weeks after that release, the Covid-19 pandemic hit, and in the market rout that followed, Snap-on's share price fell even further. That made intuitive sense for some investors because fewer cars on the road meant fewer repairs, and fewer repairs would mean lower sales for the company that sends its iconic white and red vans to auto repair shops.
However, investors who hit the sell button may not have realized that Snap-on is now more than just trucks full of wrenches. It describes itself as "a leading global innovator, manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users performing critical tasks."
It operates in four segments, described in the Annual Report for 2019 as:
The Commercial & Industrial Group, which serves "aviation and aerospace, oil and gas, mining, railroad, power generation and the military."
The Snap-on Tools Group, for "professional vehicle repair technicians who purchase products through the company's mobile tool distribution network." This is the company's traditional market.
The Repair Systems & Information Group serves mainly owners and managers of independent garages and new car dealerships.
Financial Services, for the customers of franchisees who make big-dollar purchases, and franchisees who need financing for vehicle leases and business loans.
Net sales for 2019 were:
Commercial & Industrial: $3.730 billion
Snap-on Tools Group: $1.345 billion
Repair Systems & Information Group: $1.612 billion
Finance: $245.9 million
From a long-term shareholder's perspective, the company appears to be making good on its promise to provide value, with buybacks and dividends as well as capital gains (the latter, if bought at the right price).
Last year, it bought back nearly 1.5 million shares for $238.4 million, and management noted in the annual report that it sees more repurchases under its current authorizations. GuruFocus reports that Snap-on's buyback ratio for the past three years averages 1.80.
The company also has an excellent record for dividends. According to the annual report, "In November 2019, our Board of Directors raised Snap-on's quarterly cash dividend by 13.7% to $1.08 per share. This is the tenth consecutive year with a dividend increase. Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939."
Investors also should note that it is a Buffett-Munger Screener company, one of just 22 that has met all four screening criteria: predictable revenue and earnings, a competitive advantage, little or no debt and a reasonable valuation.
We will use those four criteria to analyze Snap-on from a value investor's perspective.
It scores a four out of five-star rating from GuruFocus for steady growth of its revenue and earnings. Charted over the past 10 years, per-share figures present this way:
Will the growth continue? Snap-on has strategies that should deliver growth in coming years; as they put it in the annual report: "our priorities for capital allocation remain to strategically invest, both organically and through acquisitions, along our defined runways for growth and improvement."
More specifically, it has the Snap-on Value Creation Process with its "runways" for growth:
Enhance the franchise network.
Expand with repair shop owners and managers.
Extend to critical industries.
Build in emerging markets.
The company reported in its 10-K that it faces strong competition in each of its markets. It also has some advantages that help constitute a moat. They include:
"The company's 'coherent growth' strategy focuses on developing and expanding its professional customer base in its legacy automotive market, as well as in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high."
It also has a Rapid Continuous Improvement program that allows it to reduce waste and improve efficiency on an ongoing basis.
And, of course, it possesses perhaps the oldest and best-known brand name in its industry.
The Buffett-Munger criterion calls for maintained or growing margins, and this 10-year chart confirms they exist:
Once again, Snap-on's long-term debt has risen to near the $1 billion mark:
Obviously, the load has grown in the past couple of years, but a couple of indicators give us confidence Snap-on can handle it. First, the interest coverage ratio is 18.97, so there is ample operating income to cover the current interest expenses.
Second, and in the same vein, there is a good margin in the return on invested capital versus weighted average cost of capital ratio--14.64% versus 8.72% -- meaning the company is earning significantly more on the funds borrowed than it is paying for them.
At the end of 2019, it had $185 million of cash and cash equivalents on hand.
With a current PEG ratio (price-earnings divided by the five-year Ebitda growth rate) of 1.42, Snap-on stock is selling at a bit of premium. A ratio of 1.0 is considered fair value, while a ratio of less than 1.0 is considered undervalued and more than 1.0 is considered overvalued. Still, it is within the range in which it has been trading for the past five years.
Inclusion on the Buffett-Munger Screener reflects how the price has been pulled down by its own difficulties, "unfavorable currency and economic challenges in certain geographies" and by the pandemic and economic crises. With the current price near $137, it is roughly $50 below its peak in 2018.
Turning to the discounted cash flow calculator, it displays significant undervaluation and a broad margin of safety:
This is not included as a criterion for Buffett-Munger stocks, but is worth mentioning because Snap-on's profitability ranking is high at 9 out of 10:
Note that it has solid double-digit returns for return on equity and return on assets.
Snap-on is owned by nine of the gurus followed by GuruFocus. On March 31, the biggest position belonged to John Rogers (Trades, Portfolio) of Ariel Investment, holding 984,192 shares. The T Rowe Price Equity Income Fund (Trades, Portfolio) held 420,000 shares and Richard Pzena (Trades, Portfolio) of Pzena Investment Management held 319,642 shares.
Snap-on offers a solid foundation and strategy for future growth that should satisfy many investors.
It has a high level of predictability, a competitive moat that protects its prices, a manageable amount of debt and is currently available at a discounted price. It has a high level of profitability, which, importantly, should continue once the economy and markets return to a more normal state.
Thus, it seems a good prospect for value investors who are willing to do more due diligence.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
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This article first appeared on GuruFocus.