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Snap-On (SNA) Q3 Earnings Beat on Strong Revenue Growth

Zacks Equity Research

Snap-on Incorporated SNA maintained its impressive earnings beat streak, posting third-quarter 2017 net earnings of $2.45 per share, reflecting an increase of 10.4% from the year-ago figure. Earnings surpassed the Zacks Consensus Estimate of $2.43 by a couple of cents.

The bottom line benefited from Snap-on’s robust business model and focus on value-creation processes. Also, strong contribution from acquisitions and organic growth proved conducive to the earnings performance.

Inside the Headlines

Net sales in the quarter increased 8.4% year over year to $903.8 million and trumped the Zacks Consensus Estimate of $890 million comfortably. Excluding acquisition-related expenses and unfavorable foreign currency translation effect, organic sales rose 2.3% year over year.

Solid sales growth at Snap-on Repair Systems & Information and Commercial & Industrial Group drove the top line. However, the company’s U.S. franchise operations in the Tools Group remained subdued.

Segment wise, Commercial & Industrial Group sales rose 8.7% to $314.6 million. Organic sales were up 0.2%. Higher sales to customers in critical industries, along with and strong European-based hand tools business, drove the top line at this segment. Weak sales of power tools and tepid growth in Asia/Pacific operations offset the growth to an extent.

Snap-on’s Tools Group revenues continued to show weakness, edging down 1.1% year over year to $392.7 million. Organic sales at the segment declined 1.6%, while favorable foreign currency translation impact of $2 million offset the same somewhat. Dismal sales in the company’s U.S. franchise operations continued to drag the segment’s growth.

Repair Systems & Information continued to display impressive strength, as revenues climbed 16.6% year over year to $333.5 million. Meanwhile, organic sales at the segment improved 8.2%. Higher sales of diagnostics and repair information products to independent repair shop owners and managers, OEM dealerships and undercar equipments drove strong organic growth at the segment.

On the other hand, the Financial Services business reported revenues of $79 million compared with $71.6 million recorded in the year-ago quarter.

Operating earnings before financial services (excluding a legal charge) in the quarter came in at $168.1 million, up 6.7% from $157.6 million in the prior-year quarter.

Snap-On Incorporated Price, Consensus and EPS Surprise

Snap-On Incorporated Price, Consensus and EPS Surprise | Snap-On Incorporated Quote

Liquidity

At the end of the reported quarter, Snap-on’s cash and cash equivalents totaled $94.1 million compared with $77.6 million at the end of 2016. The company’s long-term debt came in at $755 million at quarter end, up from $708.8 million at the end of 2016.

Acquisitions

In second-quarter 2017, Snap-on acquired Norbar Torque Tools, along with its U.S. and Chinese joint ventures, for roughly $72 million. Norbar is a leading European manufacturer which boasts a complete range of torque products and also enjoys a robust foothold in critical industries, like power generation, oil & gas, mining and railroad. Norbar will complement and expand Snap-on’s existing torque portfolio, and help it cater to critical industries, particularly in powered torque products.

Earlier, in fourth-quarter 2016, Snap-on purchased Sweden-based firm — Car-O-Liner — to reinforce the Repair Systems & Information Group’s position, and fortify its hold in the auto and heavy duty markets. The company anticipates this acquisition and favorable industry trends to strengthen its relationship with repair shop owners and managers.

Snap-on also acquired torque wrench marker — Sturtevant Richmont — which is engaged in the designing, manufacturing, and distributing of mechanical and electronic torque wrenches. Snap-on believes this strategic buyout will improve its critical mechanical performance by addressing critical torque requirements.

To Conclude

Despite industry headwinds, Snap-on continues to perform impressively. The company’s overarching business model, which aims to maximize value-creation by focusing on areas like safety, quality of service, customer satisfaction and innovation, has emerged as a tried and tested growth driver. Snap-on is committed to its rapid continuous improvement (RCI) program, designed to enhance organizational effectiveness and minimize costs.

Snap-on announced plans to enhance the franchise network, expand ties with repair shop owners and managers, and foray into critical industries to strengthen its hold in emerging markets, going forward. Solid prospects across business segments, accretive acquisitions and impressive traction of the recently-launched products continue to add to the strength of this company.

However, in recent times, oil market sluggishness and currency fluctuations have been eroding the profitability of this Zacks Rank #4 (Sell) company. Further, persistent contraction in capital expenditure by auto dealers and intensifying used car asset quality pressure are formidable headwinds. The ongoing softness in industrial markets are impacting client spending, which, in turn, is adding to the company’s woes, primarily affecting its industrial business. These factors remain substantial risks for Snap-On in the times to come.

Stocks to Consider

Better-ranked stocks in the broader space include Barnes Group Inc. B, A.O. Smith Corporation AOS and SPX FLOW, Inc. FLOW. Barnes Group sports a Zacks Rank #1 (Strong Buy), while A.O. Smith and SPX FLOW carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 11.6%.

A.O. Smith also has a decent earnings surprise history, with an average beat of 3.3% over the trailing four quarters, beating estimates thrice.

SPX FLOW is expected to chart current-year growth of 9.4%, while its next year’s growth estimate is an impressive 64.1%

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