Snap-On Value Deepens After Strong Earnings
If there is one thing the market needs from Snap-on NYSE: SNA and other globally oriented companies is a little reassurance in the supply chain. While Snap-on did not give any specific guidance the lack of details is less than reassuring in a world where supply disruptions, inflation, and labor shortages are impacting both the top and bottom lines. The takeaway, however, isn’t the fact Snap-on failed to give reassuring guidance but that both revenue and earnings are growing and beat the consensus estimates. If Snap-on can continue to navigate the COVID environment as it has been the stock price should perk back up. Until then, the stock pays a safely growing dividend with an attractive yield and an even more attractive outlook for distribution growth.
FX Tailwinds Boost Snap-on Results
Snap-on had a good quarter but it was the FX tailwinds that made it great. The company reported $1.04 billion in net consolidated revenue which is up 10.5% from last year, 15% from two years ago, and beat the Marketbeat.com consensus estimate by nearly 300 basis points. The strength was driven by gains in all segments that were amplified by currency conversion from the offshore business. Currency conversion added roughly 1000 basis points to growth on top of the 10.6% increase in Commercial&Industrial sales, 9.9% increase in Repair Systems, and 3.7% increase in Snap-on Tools revenue. The Financial Services segment also did well with growth of 6.5%.
Moving down the report the company did experience some margin contraction but less than what was expected. The company reported 19.4% in adjusted operating margin compared to 19.7% last year and fixed GAAP earnings at a rate above the consensus. The GAAP earnings of $3.57 are up 8.8% versus last year, 20.6% versus 2019, and beat the consensus estimate by $0.17.
Looking forward, the company remains positive on the long-term trajectory for growth but sees uncertainty in the quarter ahead. For that reason, execs declined to give any formal guidance and instead said this…
“COVID-19, its subsequent variants, as well as related supply chain inefficiencies, continue to impact economic activity worldwide in 2021. Snap-on is accommodating to the virus-related turbulence and is pursuing opportunities in this mixed environment. The company believes that our markets and our operations have demonstrated and possess considerable resilience against the impact of the virus and that there will be ongoing advancement in the midst of the pandemic. The trajectory of progress, however, may be uncertain due to the evolving nature and duration of the current situation and in 2021…”
Snap-on’s Dividend Is Not Tooling Around
Snap-on pays a very safe 2.16% dividend yield and one that comes with a very attractive outlook for growth. The company is paying out less than 35% of its earnings and has ample free cash flow on the books. The company is only very lightly levered and has a fortress balance sheet as well. Based on the 11-year history of increases and the 15% distribution CAGR we are expecting the next increase to be equally large. If history serves as a guide, the next increase should come with the next dividend declaration.
The Technical Outlook: Snap-on Falls To Support
Shares of Snap-on fell more than 5.0% in the wake of the earnings report but found support at the $215 level. This level has supported price action several times and appears to be a strong level. The indicators are consistent with a peak in price action but not a reversal so there are no red flags yet. A move below $215 would be bearish but may only get as far as $210. A move below $210 would be more bearish.
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