Snap-On Reverses Course After Market-Beating Results
Shares of Snap-On (NYSE: SNA) got a boost early in April when Goldman Sachs turned up the name when it screened for stocks with pricing power and margin control. That boost resulted in a surge to a 9-month high that has since been rejected. The rejection comes on the heels of a better-than-expected report and was sparked by a cautious outlook. Caution is due, of that, there is no doubt, but this company has been outperforming throughout the crisis and will likely do so again. The stock already offers an attractive value-to-yield combination, that will only get better as prices retreat, so we are viewing this pullback as a buying opportunity for income and value investors alike.
“COVID-19, its subsequent variants, as well as related supply chain inefficiencies, continue to impact economic activity worldwide in 2022. The company believes that our markets and our operations possess and, indeed, have demonstrated considerable resilience against the impact of the virus and that there will be ongoing advancement even in the midst of the turbulence. The trajectory, however, may be uncertain due to the evolving nature of the situation.”
Snap-On Posts Strong Quarters Despite Headwinds
Snap-On had a great quarter in Q1 despite the headwinds blowing throughout the economy. The biggest visible impact in the report is FX translation which cost the company nearly 100 basis points of growth. The revenue of $1.1 billion is down sequentially which is seasonally expected but a slim 90 basis points and up 7.1% from last year. The revenue also beat the Marketbeat.com consensus estimate by 575 basis points on strength in key business segments. On a segment basis, Commercial and Industrial posted 1.1% organic growth but that was fully offset by FX translation, particularly in the Asian markets, while Financial Services (the smallest segment by far) contracted by 6.2%. The core Snap-On Tools group grew by 7.7% while Repair and Diagnostics grew by a stronger 14.2%.
Moving down the report, the company was able to widen its margin in both the primary segments and the financial services segment. The operating margin improved by 90 basis points and helped to drive accelerated earnings growth as well. On the bottom line, the GAAP of $4.00 is up $0.50 or 1425 basis from last year and beat the consensus by $0.31. The company did not give any formal guidance but did give ample commentary to the effect that growth was expected this year.
Snap-On Is A High-Yield Value
Snap-On is trading at only 14X its earnings consensus and that figure is too low. At this level, it is a discount to the broad S&P 500 and the bulk of its peers and it pays more than 2.55% in yield. The range of valuation for peers is running from roughly 17X for Simpson Manufacturing to 30X for Fastenal which suggests at least a small multiple expansion is possible. As for the dividend, the company has been increasing the payout for the last 12 years at a 15% CAGR and is only paying 34% of earnings. We expect to see the 13th distribution increase at the end of the fiscal year.
The Technical Outlook: Snap-On Retreats To Support
Price action in Snap-On has been range-bound the past few quarters and that is not changed. The market appears set to return to support near the $215 level but we think it will result in a buying opportunity, if not now then over the next quarter or so. If support fails at the $215 level price may retreat to the $200 level where support should be stronger. If the $200 level fails the market may be too worried about what-if scenarios over the next 3 to 6 months and price action could fall to $180 or lower.
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