We maintain a Neutral rating on Snap-On Incorporated (SNA). The company’s current trailing 12-month earnings multiple is 13.1x, compared with the 12.8x average for the peer group and 14.5x for the S&P 500.
Over the last five years, SNA’s shares have traded in a range of 5.8x to 22.7x trailing 12-month earnings. Therefore, it is in the middle of the historical range, indicating upside.
The 21.8% discount to the peer group based on our forward estimate for 2012 is much less than the historical average of 24.2%, indicating very minor upside. However, considering the fact that expected earnings growth of 10.0% over the next 5 years is the same as the growth of its peers at 10.0%, we think the valuation is justified.
We therefore have a Neutral recommendation on the stock. Our target price is $66.00 or 13.14x 2012 EPS, which is well within the historical range.
The company recently reported modest first quarter results with broad-based revenue growth across its business segments. However, the economic turmoil in Europe has had a negative impact on the overall revenue, with major impact in the Repair System & Information group.
Snapshot of the recent Quarter results
Snap-On reported its financial results for the first quarter of 2012. Earnings per share were $1.21, representing a 26% increase from the year-ago quarter. Earnings results for the quarter surpassed the Zacks Consensus Estimate of $1.16.
Revenues
Net sales came in at $735.2 million in the quarter, up 6% year over year but were almost sequentially declining marginally by 0.2%. This, however, missed the Zacks Consensus Estimate of $737 million.
If we exclude the impact of foreign currency translation, sales increased by 7%. The overall growth in sales was driven by double-digit growth in the company’s tools segment and its mainstream businesses in emerging markets.
Segment Details
The Commercial and Industrial Group reported net sales of $286.5 million, up 6.4% year over year but down 3% sequentially. The year-over-year growth was primarily led by improved sales in the major businesses but the growth was partially offset by fall in the Europe-based hand tools business sales due to a weak situation in Southern Europe.
The Snap-on Tools Group revenues came in at $316.6 million, rising 12.3% annually and 8.1% sequentially, as sales in the United States has continued to improve further.
Repair Systems & Information Group recorded revenue of $226.1 million, declined 0.4% from the previous-year quarter and 4.4% sequentially. The reduction was primarily attributable to low sales of undercar equipment in Europe.
Financial Services revenue was $38 million, up 47.3% from the year-ago quarter but down 72% sequentially. The year-over-year growth was due to the constant development in finance portfolio.
Margins
Gross profit was $347.7 million, up 5.2% from the year-earlier quarter, 3.5% sequentially. Gross margin as a percentage of sales in the quarter came to 47.3% versus 47.7% from prior year. The margin pressure in its Europe-based hand tools market caused the slight decline in gross margin.
The Commercial and Industrial Group’s gross margin was 35.6%, falling from 38% in the prior-year quarter, driven by increased margin pressure in the Europe-based hand tools business.
The Snap-on Tools Group gross margin came in at 43.9% on the back of increased high US sales but declined slightly from 44.3% in the previous-year quarter.
Segment-wise, Repair Systems & Information Group posted gross profit of $106.7 million, improved by $4.6 million from previous year. The gross margin for the group came in at 47.2% in the quarter enhanced 220 basis points from 45% previous year. The rise was led by positive sales in diagnostics and repair information products. Gross profit gained from current RCI initiatives.
The operating expenses in the quarter were $250.2 million, up 2.8% year over year, mainly due to benefits from sales of RCI and restructuring initiatives but the enhancement was partly offset by increased restructuring cost.
Balance Sheet and Cash Flow
The company had cash and cash equivalents of $161.6 million, decreasing from $185.6 million at the end of the quarter. In addition, net trade & other accounts receivable came in $463.1 million, which nearly remains flat year over year. Long-term debt reduced to $965.5 million from $967.9 million in the previous year quarter.
Net cash provided by operating activities amounted to $73 million in the quarter compared to $58 million in the previous year. Capital expenditures incurred were $21.8 million versus $18.6 million at the end of the previous year quarter.
Peers
Snap-on Incorporated is a leading global innovator, manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users performing critical tasks. The Home Depot, Inc (HD) is a major competitor.
Our Recommendation
Snap-On currently has a Zacks Rank #2, which implies a short term (1-3 months) Buy rating on the stock.
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SNAP-ON INC (SNA): Free Stock Analysis Report
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