Since January, the global stock market has been on high alert due to unstable inflation rates and geopolitical tensions. Hence, Snap-on (SNA) has suffered despite a long history of stable returns. Although the stock has picked up pace recently, shares remain attractive to conservative investors.
Snap-on is a company that provides tools for the construction industry. Its products include saws, drills, and sanders.
It operates through a franchise model, selling all its tools to auto dealers. Franchisees who purchase the devices can then use them in their shops and service their customers’ cars.
Even with the major supply chain challenges currently, the business has seen positive contributions from its value creation plan.
The company’s latest quarterly results revealed that it was able to surpass pandemic-related declines, and deliver healthy numbers. Its process of rapid continuous improvement is on track, while making a big effort to reduce costs.
The company is characterized by years of incredible growth, which the market is starting to notice. Therefore, I am bullish on the stock.
Stellar Earnings Record
Snap-on has reported excellent earnings across the years, with a tendency to do so in any environment. The company’s first earnings report came in on time and exceeded the forecast, with revenues and earnings per share coming well ahead of estimates.
Company earnings for the last quarter stood at $217.4 million, or $4 per share. This represents a year-over-year increase of almost 13%, comparing favorably with the previous year’s Q1 earnings of $192.6 million, or $3.50 per share.
Analysts expected the company to earn a little under $3 per share.
Quarterly sales came in at $1.097 billion, up over 7% from last year. This includes acquisition-related sales of $8.5 million and 8% organic growth, with gains in every group.
These excellent figures follow an exceptional report for the fourth quarter and full-year 2021 unveiled in February.
Sales at the company were $1.108 billion in the fourth quarter, which was up 3.2% from 2020, and organic sales went up 2.3%.
Operating income for the quarter was $232.2 million, which is 21% of sales. This compares appreciatively to last year when it earned $216.2 million, which was 20% of its sales in 2020.
Snap-on is Great for Income Investors
In recent months, dividend stocks have risen as the markets have become more volatile and unpredictable. These stocks tend to offer investment returns without the need for as much risk.
Smooth, continuous dividends are a moneymaker for shareholders. Snap-on has paid consecutive quarterly dividends each period since 1939, and those who want to retire in the future may be interested in this return on investment opportunity.
The company’s dividend is consistently high despite a payout ratio of around 35%. This means that the company always has enough cash to cover these payments. This also means it will be able to raise the dividend in the future.
Risks
Analysts and investors are concerned that the rise in interest rates will harm the company’s prospects moving forward.
Temporarily high rates may be making investors cautious about investing in this stock. The company’s over 100-year history is its future protection from inflation during periods with heightened expectations from the public. Given the company’s strong balance sheet, investors need not worry about rising interest rates.
Some investors are worried that the economy is changing rapidly and SNA tools are becoming irrelevant. For example, renewables are becoming more popular with each passing day.
Globally, EV sales have grown. Toyota (TM) and Volkswagen (VWAGY) announced plans to invest $170 billion into EV production. General Motors (GM) says it is committed to transitioning to EVs, while Ford (F) plans to make all of its European cars electric by 2030.
Electric cars need repairs just like gas-powered cars. Therefore, the growth in EVs is not a danger for the company.
In addition, gas-electric hybrids and other transportation methods will not totally eliminate gas-powered vehicles in the coming decades. Therefore, SNA tools will remain in vogue for several years moving forward.
You may notice how many auto body shops, repair shops, used car lots, and vehicle service stations support local communities outside major cities. That will not change anytime soon, and will continue driving demand for franchises.
Wall Street’s Take
Due to positive momentum recently in shares, the upside for this stock is limited. Snap-on has a Hold consensus rating based on three Buys, one Hold, and two Sells assigned in the last three months. The average Snap-on price target of $246 suggests approximately 8.2% upside from here.
Bottom Line
This company primarily plays in the vehicle repair market as a global provider of tools, equipment, diagnostics, and information systems. During the pandemic, the company had to scramble to contain the damage wrought by the virus on its business operations.
Due to the nature of the crisis, Snap-on had to face tough times, and its business was hit by lower vehicle sales. However, Snap-on is now out of the woods, and you can see that with its latest earnings.
The stock is always considered an excellent pick for a retirement portfolio. Therefore, you should not expect volatile swings from this stock. During the past five years, shares have been up just double digits.
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