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Will Snap-on's Efforts Bring the Stock Back on Growth Track?

Zacks Equity Research

Snap-on Incorporated SNA is losing footing in investors’ books, owing to soft sales trend and currency headwinds. These hurt the company’s second-quarter 2019 performance. A glimpse at this stock’s price performance reveals that it has underperformed the industry in the past one year. Shares of this Kenosha, WI-based company have lost approximately 16% wider than the industry’s 1.5% decline.

Nevertheless, the company’s robust business model helps enhancing the value-creation processes, which focuses on safety, quality of service, customer satisfaction and innovation. Also, its RCI program, designed to enhance organizational effectiveness and minimize costs, has been driving margins and profitability. Moreover, Snap-on’s recent acquisitions are helping its Repair Systems & Information Group segment to return growth. That said, let’s take a closer look at the factors impacting its performance.

Hurdles on the Way

Snap-on is grappling with soft sales trend that continued for the fifth straight time in the second quarter. Sales dropped due to adverse impacts of foreign currency translations, partly offset by organic sales growth and contributions from acquisitions. Additionally, decline in sales across the Commercial & Industrial Group segment hurt the company’s top line, which was also impacted by currency headwinds.

The company’s top line in second-quarter 2019 included negative impacts from unfavorable foreign currency of about $19.5 million. Further, unfavorable currency hurt operating income by nearly $5.9 million. In fact, currency had an adverse impact of $10.1 million, $5.1 million and $5.9 million, respectively, at the company’s Commercial & Industrial Group, Tools Group and Repair Systems & Information Group segments in the reported quarter. Though management expects currency translations to improve in the third quarter, the magnitude of impacts on quarterly results remains to be seen.

Will Growth Efforts Aid Revival?

Snap-on’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. Additionally, the company is dedicated toward 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 Snap-on to boost sales and margins, and generate savings. Savings from the RCI initiative reflect gains from the continuous productivity and process improvement plans.

Management intends to boost customer services along with enhancing manufacturing and supply chain capabilities through the RCI initiatives and further investments. Savings from RCI initiatives mainly drove gross margin expansion in the second quarter. The company anticipates making progress on these growth strategies in 2019, which should drive its bottom line.

Apart from these, the company’s Repair Systems & Information Group segment, which remained sluggish for the last few quarters, recorded sales growth of 1.7% in second-quarter 2019. Organic sales at the segment improved 3.5%, owing to increased sales to original equipment manufacturer (“OEM”) dealerships. Moreover, its operating expense margin improved 130 basis points (bps), driven by higher sales to OEM dealerships and the benefits from RCI initiatives.

The company acquired Cognitran Limited, a market leader in after sales solutions, which is likely to improve its Repair Systems & Information Group segment. Notably, the buyout is expected to reinforce Snap-on’s capabilities while providing solutions through integrated upstream services to OEM clients. Cognitran focuses on flexible and highly scalable “Software as a Service” (SaaS) products for OEM consumers and their dealers. These products also focus on the creation and delivery of services, diagnostics, parts and repair information to the OEM dealers and connected vehicle platforms.

We expect the aforementioned growth initiatives to act as tailwinds, injecting some momentum in this Zacks Rank #3 (Hold) company’s performance in the coming months.

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