SNAP-ON INC. $40 (New York symbol SNA; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 57.7 million; Market cap: $2.3 billion; Price-to-sales ratio: 1.0; Dividend yield: 3.0%; WSSF Rating: Average) makes hand and power tools for auto mechanics. It sells these through franchised vans that visit garages. This lets it build closer relationships with customers, which gives it an advantage over competitors. It also keeps Snap-On’s distribution costs down.
Many U.S. carmakers have closed dealerships in response to weak sales. This has cut the number of repair shops that Snap-On can supply.
Snap-On’s earnings fell 53.5% in the three months ended October 3, 2009, to $25.4 million, or $0.44 a share. A year earlier, it earned $54.6 million, or $0.94 a share.
The latest results included a $4.7-million charge related to Snap-On’s ongoing plan to streamline production and cut waste. As well, the company’s finance division recorded a $5.3-million charge after its finance division ended a joint venture. The year-earlier quarter included a $1.4-million restructuring charge and $4.8 million in finance income. Sales fell 16.6%, to $581.8 million from $697.8 million.
The company’s $902.4 million of long-term debt is a moderate 39% of its market cap. It holds cash of $709.0 million, or $12.28 a share.
Snap-On is diversifying its operations. It now gets 20% of its sales (and 40% of its earnings) from selling electronic diagnostic equipment that helps mechanics identify specific problems. Most new cars use computer chips to control certain functions, so demand for this type of equipment is rising. That’s good news for Snap-On, since selling diagnostic equipment generates higher profits than tools.
The stock trades at 17.9 times the $2.24 a share that the company will probably earn in 2009. That gives Snap-On plenty of room to keep paying its $1.20 dividend, which yields 3.0%.
Snap-On is a buy.
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