February 09, 2015 Snap-On Inc. (SNA-NYSE) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 09/26/2011 Current Price (02/06/15) $140.99 Target Price $148.00 SUMMARY Keeping its winning streak alive, Snap-on came up with another earnings beat this season. The company s fourthquarter 2014 earnings surpassed the Zacks Consensus Estimate by 7.6% and the year-ago figure by 23.1%. This was driven by Snap-on s improved operational performance across all segments. The company has been benefiting from its focus on enhancing van network, extending service to critical industries, strategic acquisitions and expansion in emerging markets. The company expects the successful deployment of Snap-on Value Creation Processes to benefit its 2015 financials too. Due to these initiatives, Snap-on expects to incur capital expenditures in the range of $80 $90 million this year. Overall, we remain Neutral on the stock. SUMMARY DATA 52-Week High $140.99 52-Week Low $97.56 One-Year Return (%) 31.26 Beta 1.32 Average Daily Volume (sh) 392,079 Shares Outstanding (mil) 58 Market Capitalization ($mil) $8,177 Short Interest Ratio (days) 1.73 Institutional Ownership (%) 84 Insider Ownership (%) 3 Annual Cash Dividend $2.12 Dividend Yield (%) 1.50 5-Yr. Historical Growth Rates Sales (%) 5.7 Earnings Per Share (%) 24.2 Dividend (%) 10.9 using TTM EPS 19.7 using 2015 Estimate 18.4 using 2016 Estimate 16.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page RECENT NEWS Risk Level * Low, Type of Stock Large-Growth Industry Tools-Hand Held Zacks Industry Rank * 4 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 742 A 764 A 753 A 798 A 3,057 A 2014 788 A 827 A 806 A 857 A 3,278 A 2015 821 E 864 E 836 E 892 E 3,413 E 2016 3,475 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.40 A $1.52 A $1.43 A $1.60 A $5.95 A 2014 $1.62 A $1.80 A $1.76 A $1.97 A $7.15 A 2015 $1.80 E $1.97 E $1.90 E $2.01 E $7.68 E 2016 $8.49 E Projected EPS Growth - Next 5 Years % 9 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
Snap-on Tops Earnings on Improved Operational Performance Feb 5, 2015 Snap-on reported strong fourth-quarter 2014 results with healthy growth in net sales and earnings. Earnings per share of $1.97 surpassed the Zacks Consensus Estimate of $1.83 per share by 7.6% and the year-ago figure of $1.60 by 23.1%. Also, for full-year 2014, Snap-on reported earnings per share of $7.14, which increased 20.4% on a yearover-year basis. Quarterly and yearly earnings benefitted from the company s improved operational performance across all segments. Inside the Headlines Net sales in the fourth quarter increased 7.5% year over year to $857.4 million and were well above the Zacks Consensus Estimate of $847 million. Excluding acquisition related expenses and favorable foreign currency translation effect, organic sales rose 9.8% year over year. For 2014, net sales increased 7.2% year over year to $3.3 billion. Excluding acquisition related expenses and a favorable foreign currency translation effect, organic sales increased 6.9% on a year-over-year basis. As per the segments, in the fourth quarter 2014, the Commercial & Industrial Group segment sales increased 5.3% year over year to $298.2 million on higher demand in critical industries, strong performance of European hand tools and Asia/Pacific businesses. Organic sales also increased 9.9% year over year. The Snap-on Tools Group segment revenues improved 10.4% year over year to $387.5 million, driven by significant gains in both the U.S. and international franchise operations. Meanwhile, organic sales were up 11.8%. The Repair Systems & Information segment recorded a sales increase of 6.9% year over year to $282.8 million, primarily on higher sales to OEM dealership service and, increased sales of undercar equipments and diagnostic and repair information products. Meanwhile, organic sales were up 6.9% year over year. On the other hand, Financial Services business reported revenues of $59.4 million compared with $47.4 million in the year-ago quarter. Also, gross profit for the fourth quarter was $411.3 million, up from $378.5 million in the prior-year quarter. Liquidity & Cash Flow At the end of the year, cash and cash equivalents totaled $132.9 million compared with $217.6 million at the end of 2013. The company had long-term debt of $862.7 million as compared to $858.9 million at the end of 2013. Net cash from operating activities increased to $397.9 million in 2014 from $392.6 million in the prior year. VALUATION Equity Research SNA Page 2
Snap-on s current trailing 12-month earnings multiple is 19.7x, compared to the 16.5x average for the peer group and 18.9x for the S&P 500. Over the last five years, Snap-on s shares have traded in a range of 10.6x to 20.5x trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it should move in line with the broader U.S. equity market in the next six to twelve months. Our $148.00 target price, or 19.3x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Snap-On, Inc. (SNA) 18.4 16.6 9.0 16.2 19.7 20.5 10.6 Industry Average 18.8 16.8 9.0 10.6 16.5 71.0 29.8 S&P 500 16.4 15.4 10.7 15.0 18.9 19.4 12.0 Makita Corporation ADR (MKTAY) 12.9 14.9 22.0 11.3 Shopsmith Inc (SSMH) Toro Co (TTC) 19.6 16.9 16.3 22.1 26.3 13.6 QEP Co. Inc. (QEPC) 3.3 6.1 8.7 4.4 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Snap-On, Inc. (SNA) 3.4 3.5 1.6 18.0 0.4 1.6 13.4 Industry Average 2.8 2.8 2.8 16.6 0.3 0.9 7.8 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research SNA Page 3
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research SNA Page 4
OVERVIEW Headquartered in Kenosha, WI, Snap-on Incorporated (SNA) is a global provider of professional tools, equipment, and related solutions for technicians, vehicle service centers, original equipment manufacturers (OEMs) and other industrial users. Products include a broad range of professional hand and power tools; tool storage; vehicle diagnostics and service equipment; business management systems; equipment repair services; and other tool and equipment solutions. The company divides its operations in four segments: Snap-on Tools Group, Commercial & Industrial Group, Repair Systems & Information Group and Financial Services segment. Snap-on Tools Group (44% of the total revenue in fourth-quarter 2013): The segment consists of the business operations serving the worldwide franchise van channel. Commercial & Industrial Group (35.5%): This segment comprises business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. Repair Systems & Information Group (33%): The segment consists of business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services (5.9%): This segment offers financing options, such as loans to franchisees customers and Snap-on s industrial and other customers for the purchase or lease of tools, equipment and diagnostic products on an extended term payment plan. In addition, the segment also provides business loans and vehicle leases to franchisees. REASONS TO BUY The biggest advantage of Snap-on is its ability to innovate which it has been maintaining over the last nine decades. Snap-on has invested in new products and increased brand awareness. The company has managed to create product excitement and real customer value through a combination of innovation and customer connection processes and when combined with Rapid Continuous Improvement (RCI), they enable progress. Wisconsin lab, which is called Innovation Works, combines innovation and customer connection. The Rapid Continuous Improvement (RCI) process, which is designed to improve organizational effectiveness and lower costs, including working capital requirements, has helped improve sales, margins and savings for the company. As a result, asset utilization has improved by rationalizing production through plant closures, and working capital has been used more effectively. Part of the Rapid Continuous Improvement process is the transformation of Snap-on s global manufacturing and supply chain into a market-demand-based, lower-cost replenishment system. Through a structured approach of supply chain and franchise improvement initiatives, order-fill rates are improving and profitability is increasing across most operating segments. The company continues to invest in its planned growth schemes, including further expansion of its manufacturing capacity in evolving nations like Asia. Under-car equipment is an important, high visibility and high-value product line for the company. It allows Snap-on to clearly showcase its advantage in innovation, thus helping the company to improve its position in the Asia Pacific. Also the high barrier entry in this sector is a positive for the company. Equity Research SNA Page 5
In order to expand its existing Under-car equipment line of products, Snap-on acquired Challenger Lifts. The latter primarily designs, manufactures, and distributes a comprehensive line of superior car lifts, jacks and auto lift accessories primarily targeting customers in the automotive repair sector. The product line of Challenger Lifts perfectly complements the existing business of Snap-on s Repair Systems & Information segment. Through its initiatives for enhancing customer engagement using creative marketing ideas, the company is trying to strengthen its worldwide business. The company s recent initiatives such as Rock and Roll Cab Express and Techno-Vans are exciting from a customer s point of view and are expected to accelerate direct purchase. These mobile showrooms will likely accelerate sales growth. In China, although the industrial sector is weakening, the individual household consumption is increasing, thereby offering a great opportunity for the company. Thus, Snap-on is set to enhance its position based on these developments. REASONS TO SELL The principal raw material used in the manufacture of Snap-on products is steel. The raw material is purchased from competitive and price-sensitive markets. In order to meet Snap-on s high quality standards, the steel needs to be made from specialized alloys, which are available only from a limited group of approved suppliers. Further, these raw materials have historically exhibited price and demand fluctuations which are cyclical in nature. One-third of the company s revenues are derived from its European businesses, which continue to be impacted by the after effects of the European financial crisis, thereby providing limited visibility regarding the company s future performance. The U.S. automotive industry is highly sensitive to the fluctuating consumer confidence, which could result in the failure of certain automobile manufacturers, suppliers and dealers. It could also result in a reduction in the number of automobile dealerships through consolidations. Such occurrences could substantially affect sales and margins for Snap-on. The company s military business depends largely on federal decisions and other external factors. Political issues like the recent budgetary impasse in the U.S., government shutdown and sequestration can be highly taxing for the company s business going forward. Equity Research SNA Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SNA. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.5%, Neutral - 77.0%, Underperform 6.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. Reasons for Update 6B Supriyo Bose Lekha Gupta Lekha Gupta N/A Lekha Gupta Analyst Note Equity Research SNA Page 7