Snap-on, Inc (NYSE: SNA) is one of the world’s leading manufacturers of hand and power tools and related products and services for professional users performing critical tasks. The company operates in four reportable business segments; the Business and Industry (“C&I”) group; the Snap-on tool group (“Tools”); repair and information systems Group (“RSI”); and Financial Services.
Over the past year, the stock has been one of the few places in the market to find refuge, with a 1-year decline of 2.6% versus a decline of nearly 17% across the S&P 500.
Following their recent earnings release, SNA lost 5% and the shares are now down 5% year-to-date. For potential investors, the stock offers above-market stability, in addition to ongoing dividend payouts that grow at an attractive compound growth rate. The outlook for the business is also positive and will continue to be supported by steadily increasing demand for vehicle maintenance and repair. While the benefits are there, they may not be enough to satisfy those looking for bargains in the high-end market. For those looking for shelter at a reasonable cost, however, SNA remains a quality wallet.
SNA Q3FY22 Revenue Summary
For the quarter ended October 1, 2022, SNA reported total consolidated net revenue excluding Financial Services revenue of +$1.1 billion. This was 6.2% more than the same period last year and +$30M better than expected. Unfavorable currency conversion (“forex”) weighed on total consolidated sales by +$39.1 million. On the other hand, organic revenue, which refers to revenue from continuing operations excluding currency effects, was up 10.4%.
While gross profit (“GP”) increased by 2.3%, margins decreased by 190 basis points (“bps”) due to higher material and other costs, mainly offset by a volume of Higher overall sales and favorable pricing actions resulting from the company’s continued rapid growth. improvement initiatives (“ROI”), which are a structured set of tools and processes intended to eliminate waste and improve operations across their multiple businesses and geographies.
Savings from their RCI initiatives were also realized in total operating expenses, which as a percentage of net sales decreased 280 basis points in the quarter. This fueled overall operating profit before Financial Services which increased 11% year over year with a 90 basis point improvement in total operating margins.
Including Financials, which posted virtually unchanged results from the prior year, total operating profit increased 6.6%, with only 20 basis points of improvement in total margins .
Within individual segments, total revenue was earned proportionally across the three non-financial service groups, with tools accounting for the largest share of non-financial segment revenue at 39%.
RSI Group led the way in the current period, which saw segment revenue grow double-digit, including 17.2% organic sales growth, primarily driven by double-digit increases in business with OEM dealers and under-car equipment sales.
In addition to driving revenue growth in the current period, RSI has also contributed favorably to operating margins, posting a 10 basis point improvement over last year against declines of 20 basis points. and 60 basis points in tools and C&I, respectively.
Overall, the three non-financial segments all recorded revenue growth which was weighed down by currency effects, particularly in the C&I group, which suffered a decline of 6.4% compared to 2.1% and 3.6% for tools and RSI, respectively. Additionally, GP margins were lower in all three segments, but this was offset by the strength of overall expense control.
In the financial services sector, revenue was essentially unchanged, but operating profit fell 5.9% due to higher provisions for credit losses. However, the average yields on financial and contractual claims remained stable. And that was accompanied by an 11.5% increase in mounts.
Total cash flow in the quarter remained positive, but down from last year mainly due to investments in working capital, particularly inventory, which is now up +151M $ compared to year-end 2021 levels. Revenue, however, remains stable at 2.6x compared to 2.8x at the start of the year.
Overall, SNA generated +$81m in free cash flow in the quarter and approximately +$264m year-to-date, leaving them in a cash position at the end of the quarter. approximately +$760 million, with over +$800 million available under their revolving credit facilities.
SNA continues to be a leader in providing high quality diagnostic tools and equipment for the professional automotive repair industry. In the current quarter, overall sales were supported not only by favorable pricing actions, but also by higher volumes, a testament to the quality of their high service strategies which revolve around its broad franchise basis.
It also suggests the continued demand for vehicle maintenance and repair, especially on an ever-growing population of older vehicles, the average age of which is around 12 years. As used cars and new cars become increasingly out of reach for many buyers, more buyers will likely choose to hold on to their vehicles for as long as they can. This should serve as a tailwind for the SNA C&I and Tools group.
The positive trends noted during the conference call reinforced this view. These trends include higher repair spending and some of the highest numbers of technicians seen in decades, in part due to above-average wage growth in the industry, resulting from increased demand for critical skills. in repair on modern vehicles with more complex technological components.
Continued strength in demand helped SNA post its 9th consecutive quarter of year-over-year expansion. But this was partially offset by negative currency effects which affected all segments, particularly C&I, which benefited from double-digit gains in Asia-Pacific operations and the segment’s specialist tools business but was weighed down by more than 6% by the exchange rate.
And despite price strength, gross margins further declined due to higher material and other costs, although this was offset by adequate control of operating expenses, particularly in the RSI segment, which recorded a 400 basis point improvement in operating margins compared to last year.
The results were also weighed down by their financial services segment, which reported virtually no change in year-over-year revenue but contributed nearly 6% to the decline in operating profit. While the segment represents less than 10% of total consolidated revenue, it is a high-margin business that represents more than 20% of total operating profit. Thus, any margin weakness in this segment would disproportionately affect the consolidated figures.
One can cite the increase in credit provisions as a concern, but the increase was essentially a normalization from the historically lower provision rate recorded last year. And compared to the 2017-2019 rates, the current year provisions are even lower. Credit conditions therefore still appear stable despite the uncertain macroeconomic environment.
Apart from currency effects, which should not persist over the long term, the SNA does not seem exposed to the risk of a possible slowdown in economic conditions. The industry tends to be more resilient to recession due to the essential nature of vehicle repairs and maintenance. This should provide SNA with a continued source of positive cash flow to add to its existing liquidity profile, which is already strong due to its limited leverage.
At 12x forward earnings, the SNA is trading at a discount to the broader S&P 500, which is currently trading at around 16x. The multiple is also slightly lower than their five-year average of 14x. While there is some built-in upside in the action, it may not be enough in the short term for investors looking for bargains in the market.
Stocks come with a reliable dividend payout with a solid track record of double-digit growth rates. But the current yield is not attractive enough compared to other risk-free alternatives. While not the most attractive to new investors, existing shareholders will likely benefit from continued stability and a modest rebound in the current share price should current market sentiment turn around.