Snap-On Inc. | Executive Summary

Kevin Farshchi, Bradley Coyne, Kushal Chukkapalli, Melanie Tan

March 17, 2015

Snap-On

Headquartered in Kenosha, Wisconsin, Snap-On Inc. is a mid-cap company founded in 1920 with $5.89 billion market capitalization and operates across 130 countries. It has four business segments – Commercial and Industrial group, Tools, Repair Systems & Information, and Financial Services.

Industry Overview

Snap-on belongs to Industrial goods sector which sells tools and accessories. Most of their product range is used for automobile or household purposes. We are a little skeptical about the growth in this industry. Many expect to see a growth in the industry, especially in the North American and emerging markets, also realizing the potential benefits from the recovering European economy. The increasing purchasing power and the improvement in the driving mileage of the cars are seen as the growth drivers.

The industry is highly correlated with manufacturing prospects and therefore the global economy as a whole. The fluctuating steel prices and the default risk from the franchisees and the consumers are the firm specific risks.

Financial Analysis

Not only profitability and efficiency ratios suggest that Snap-On is a fundamentally strong and stable business, Snap-On’s revenues and operating earnings have been growing. Last year, operating margin from operations was 16.3 %. Moreover, 66% of Snap-on’s net sales came from North America and 20% from Europe and 14% from the rest of the world. Financial Services contributed 6% of total revenue. There is an upward trend that can be seen in the financial services division. Finally, in terms of products, Tools took up 37% of the net sales while Equipment and Diagnostics split the other 57%. Snap-on competes on its quality of products and services, breadth and depth of product coverage, and technological innovation.

SWOT Analysis

Overall, Snap-on has a diversified business portfolio with a strong distribution system and ample supply of raw materials. Its risks include its dependence on franchisee revenue and extension of credit and volatility of growth in emerging markets. Previous bad acquisitions have affected the company’s performance, but the firm is on an upward slope again.

In the future, opportunities for Snap-on lie in rising consumer demand, stronger automotive aftermarket, and growing emerging markets. Also, investment into R&D also remains an opportunity for the firm to maintain their innovative prowess in the market. Threats such as competition in the industry, exposure to raw material price fluctuations, and financial regulatory changes may have adverse impact Snap-on’s revenue.

Industry Analysis

Compared to its peers, Snap-on’s stock has performed better in recent history. In the past 3 years, the stock prices of its peers have followed a stable trend, while Snap-on has been gradually increasing; earning higher returns for its investors without added volatility compared to the industry. In the aftermath of the financial crisis, Snap-on has managed to produce positive returns due to the auto industry recovery. As the company expands its business in the emerging markets, a market poised for higher auto sales, it too will benefit from increased new auto sales. A business strategy which outperforms in times of recession and booms is what makes Snap-on a unique and worthwhile opportunity.

Recommendation

Considering that the calculated expected value for Snap-On is $86.65from the DCF valuation, price varies across the comparable analysis and the current price is$144.2, we believe the stock is overvalued and recommend selling 100 shares at a limit of $140.