Snap-On Stock: Demand Pullback Continues (NYSE:SNA) – Seeking Alpha | CarTailz


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snapping (NYSE:SNA) continues steadily. The company reported impressive third-quarter results. I think the company is well positioned to take advantage of the auto repair tailwind in the near term. I think it can keep and expand its range over the long term.

Since I last reported on this, the company’s organic revenue growth has accelerated. That outperformance was combined with a solid 14.1% dividend increase. Overall, I stand by my view that this is a good defensive dividend growth stock.

Third quarter snap-on results

Snap-on reported continued strong demand in its third-quarter results. The company has increased its EPS by an impressive 16% since last year. The key tools segment grew its organic revenue by 7.4% year over year.

The company reported particularly impressive results in North America. Sales in North America are up 11.2% since last year.

But Snap-on’s results were dragged down by weakness in Europe. Sales in Europe have fallen 18% since last year. This offset solid growth in North America and the rest of the world.

Part of this was due to unfavorable currency conversion issues. Foreign currency headwinds have been an ongoing concern for the company. The company reported an impressive 10.4% revenue growth rate at constant exchange rates.

Snap-on consolidated results for Q3 2022

Snap-on Q3 2022 quarterly financial report

Most of Snap-on’s metrics are moving in the right direction. The company increased its gross profit and reduced its expenses. Excluding the financing segment, it reduced its operating expenses by 3.2% year over year. This is an impressive achievement when inflation is so high.

I am impressed with the company’s organic sales growth. That’s because Snap-on has been struggling to grow its sales for some time. From 2016 to 2020, sales grew at only 1.2% CAGR. Then, from 2020 to 2021, sales suddenly jumped 18%. So that’s a good sign that the company can beat those results. It’s even more impressive to outperform these fierce competitions with double-digit organic growth.

What is the view?

I think Snap-on’s prospects are solid even if the overall environment is deteriorating. In the short term, the company has a stable sales basis. Cars are often a non-discretionary expense, particularly in most of the United States. The auto repair industry is a fundamental necessity regardless of the environment.

New car sales have declined in recent years due to supply chain constraints. This has led to an increase in the average age of cars. In the current economic crisis, car repairs are more important than ever. Even as the economy slows, Snap-on reports a strong demand environment. Management even increases production.

But there are still some risks in the long run. The auto industry is changing, especially with the increasing adoption of electric vehicles. EVs accounted for 5% of auto sales in the United States last year, up from 2% in 2019. These cars have different repair and maintenance needs than ICE cars. These trends could hurt Snap-on’s business.

I think Snap-on can handle this headwind. Management seems aware of future trends. They regularly discuss electric vehicles and hybrids in their salary calls. They also add new products and offers to capitalize on these trends.

Snap-on Q3 2022 Repair Systems & Information Results

Snap-on Q3 2022 quarterly financial report

A good example of this is the company’s repair systems and information division. The segment grew its organic revenue by a solid 17.2% in the quarter. This was driven by strong undercarriage equipment sales. This equipment is becoming increasingly important as cars become more complex. Management provided further details on its earnings conference call.

Collision repair is a star in this era. I think it’s driven by the idea that the cars now have this neural network of sensors. So every time – if you just dent the bumper, it costs thousands of dollars because you have to recalibrate everything and whatnot.

So collision shops had to upgrade to take advantage of this to actually effectively be able to not just restore form but get things back to operational performance. But also the other stores that we sell through the other products like lifts, just basic lifts which you would think would be the most vanilla products in the situation are selling pretty well.

So I think it’s up to the salvage repair shops, but also the repair shops in general that are looking to the future and they’re excited about it. Like I said, I think even the dealers are starting to get over the idea that they have no cars to sell and are turning to repairs.

The auto industry is changing, but I think Snap-on is well positioned to adapt. I think this is important when assessing it as a long-term dividend growth stock. It is important that the company positions itself for the long term.

Still a solid review

I still believe Snap-on is trading at a reasonable valuation. The company has a forward P/E ratio of 13.3 and a forward EV/EBITDA of 9.4. Over the past 12 months, the company has generated a 14% ROIC. These are strong metrics. I think this valuation is justified by the company’s fundamentals.

The company has a solid balance sheet. It has $760 million in cash on hand, backed by an $800 million undrawn line of credit. That compares to just $1.2 billion in debt. This gives Snap-on a healthy debt to EBITDA of 0.9. Most of the company’s debt bears extremely low interest rates, at a weighted average rate of 3.47%. This is below the current two-year Treasury yield (US2Y). 75% of this debt is not even due until 2048.

Snap-on Cash Flow Results for Q3 2022

Snap-on Q3 2022 quarterly financial report

I would like to point out that the business has experienced some cash flow headwinds. During its most recent quarter, the company converted just 49% of its net income into free cash flow. Over the past 12 months, Snap-on has generated FCF equal to just 68% of its net income. This is down from the 107% five-year average conversion rate. Management attributes this to the increase in the company’s accounts receivable and inventories. Both are signs of high demand, but I’d keep an eye on that over the coming quarters.

The company continues to generate strong shareholder returns. Even with these free cash flow headwinds, the dividend is well-funded. The company demonstrated that with another strong dividend increase of 14.1%. Even after those payouts, the company has the cash to continue buying back its shares. It has reduced its outstanding shares by almost 2% since the beginning of 2021.

Final Verdict

I still think this is an unambitious investment. Snap-on is unlikely to see very high growth over the long term. But I like the financial profile of the company. I think it is well positioned for the current environment. I still think this is a good buy for a defensive dividend growth portfolio.

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