Snap-On Stock: A Good Company, But Wait For A Better Entry Point (NYSE:SNA)

When selecting an funding, I goal to buy high-quality corporations which are buying and selling with an inexpensive margin of security and supply a wholesome dividend progress monitor report.

One high-quality firm that has quite a lot of what I’m searching for in an funding is Snap-on Integrated (NYSE:SNA). Snap-on has a powerful enterprise moat and powerful dividend progress, however doesn’t seem to supply a lot in the way in which of worth in the meanwhile.

This text will look at Snap-on in depth to see why I feel the corporate could be a wonderful addition to a portfolio, however at a cheaper price.

Current Earnings Outcomes

Snap-on reported first quarter earnings outcomes on April 18th, 2024. Income was basically unchanged at $1.18 billion, however this was $20 million lower than anticipated. The corporate carried out significantly better on the bottom-line as earnings-per-share of $4.75 improved from $4.60 within the prior yr and topped analysts’ estimates by $0.09.

Outcomes have been negatively impacted by a 0.8% lower in natural gross sales. Income for Snap-on Instruments Group, the most important phase throughout the firm, fell nearly 7% to $500 million, largely due weak point within the U.S. enterprise. Industrial & Industrial was down barely to $359.9 million, as acquisition associated gross sales solely partially offset a lower in natural gross sales.

Restore Programs & Data Group was the one enterprise to show progress as income grew near 4% to $463.8 million, primarily as a consequence of natural progress and better exercise with OEM dealerships and undercar gear.

Snap-on is projected to earn $19.11 in 2024, which might symbolize progress of just below 2% in comparison with 2023.

Earnings Takeaways & Lengthy-Time period Evaluation

Snap-on reported blended first quarter outcomes, with income unchanged, however earnings-per-share bettering. Longer-term, the corporate has generated stable numbers.

Income for the 2014 to 2023 interval had a compound annual progress price of simply 4.3%, however earnings-per-share have improved at a way more spectacular price of 11.3%. A part of this can be a discount of ~5 million shares, or 8.6% of the share depend originally of the interval.

Whereas a little bit of financing engineering did support earnings progress, it doesn’t inform the entire story. Web revenue grew at greater than 10% yearly over the past decade. This was helped largely to a drastically bettering web revenue margin price that went from 12.1% in 2014 to 19.8% final yr. The opposite margins have improved too, however to not this diploma. For instance, the gross margin solely expanded 170 foundation factors, not the practically 800 level enchancment that web revenue margin skilled.

A lot of the expansion in web revenue over the past decade is because of a way more environment friendly enterprise operation. This has, in flip, drastically benefited shareholders over the long-term and explains the double-digit progress for earnings-per-share since 2014.

That being the case, earnings progress within the near-term doesn’t seem to method the historic price. The corporate’s steerage for 2024 requires a small enchancment. The analyst neighborhood additionally sees decrease progress forward.

Snap-on has a wonderful monitor report, however buyers shopping for in the present day aren’t more likely to see that degree of earnings progress if the corporate’s steerage and analyst predictions are near correct.

Dividend and Valuation Evaluation

In relation to dividend progress, there’s a lot to love about Snap-on.

Snap-on has raised for 14 consecutive years and distributed a dividend for 34 years, this compares extraordinarily nicely to the common of two.3 years and 12.1 years, respectively, for the Industrials sector.

The corporate raised its dividend by 14.8% in late 2024. That is simply above the five-year common progress price of 14.4% and under the 10-year common progress price of 15.4%. Many corporations start to decelerate the tempo of progress because the dividend turns into bigger, however this has not been the case for Snap-on. The corporate has constantly raised its dividend at a mid-teens progress price.

On the similar time, the payout ratio has remained nicely inside a wholesome vary. Shareholders are more likely to see no less than $7.44 of dividends per share in 2024 (although this may absolutely be greater as the corporate sometimes raises its dividend for the final fee of the calendar yr). Utilizing analysts’ estimates for the yr, this equates to a payout ratio of 39%. That is simply slight above the five-year common payout ratio of 33%, however nicely forward of the 26% common payout ratio since 2014.

The free money movement payout ratio reveals the dividend to be well-covered in addition to this common is 34% since 2020.

Subsequently, it seems that buyers can anticipate that the corporate will proceed to lift its dividend, although the extent of progress could possibly be much less strong if earnings progress doesn’t return to previous ranges. The rising payout ratio may additionally result in a deacceleration of dividend progress if middling earnings progress turns into the brand new norm.

Shares yield 2.7% in the present day, which compares favorably to Snap-on’s common yield of two.3% over the past decade. The present yield can also be greater than twice the common yield of the S&P 500 Index. Snap-on is offering the next degree of earnings relative to its personal historical past and to that of the market. That yield must be protected as nicely given the low payout ratios.

Snap-on is buying and selling at 14.6 occasions anticipated earnings for the yr. For context, this matches the inventory’s price-to-earnings ratio of 14.6 over the past 5 years, however is decrease than the 10-year common of 18.3. Whereas the inventory’s long-term common a number of is nicely above the place shares reside in the present day, the common valuation has settled under that extra lately.

I discover the enterprise to be engaging and the dividend progress is strictly what I would like in an organization. Nonetheless, the market just isn’t paying up for these qualities in the meanwhile, making me hesitant to assign an aggressive valuation vary. I consider honest worth belongs in a variety of 13 to fifteen occasions earnings.

Utilizing estimates for this yr, this ends in a goal worth vary of $248 to $287. On the present worth of $279, shareholders may see as a lot as an 11% decline whereas the upside could be simply ~3%. As a lot as I like the corporate, that’s not sufficient margin of security to entice a purchase order of the inventory.

Nearer to the decrease finish of that worth vary and I’d be a purchaser of Snap-on, as that degree would offer significantly extra security. Snap-on final traded close to this degree in late October 2023, however reached the low mid-$250 as lately as the start of July. It common for the inventory to commerce at this degree, so that might be my entry level.

Remaining Ideas

Snap-on has an interesting enterprise mannequin that has generated stable income progress and earnings-per-share at a excessive price for a really very long time. The corporate additionally pays a pleasant dividend yield that seems to be very protected. The dividend additionally has a powerful progress price.

The difficulty that I discover with the inventory is that Snap-on’s earnings progress price over the subsequent few years is forecasted to be within the low- to mid-single-digits, which saps a few of my enthusiasm for the identify. The market has not bid shares as much as the decade-long common a number of regardless of the historic efficiency, probably as a result of future progress is projected to be on the low facet.

The current valuation is close to the highest finish of my goal vary, which might make Snap-on barely overvalued on the present time.

Nearer to 13 occasions earnings-per-share, I’d really feel rather more snug including the inventory. Till then, I price shares of Snap-on as a maintain.