Snap-on Profits

Snap-on reported Q2 earnings on 7/18/19 and results lined up with our expectations. Total revenue was essentially flat at $951 million against the year-ago period, as organic sales rose 1.6%, but were offset by a similar amount of unfavorable currency translation.

Financial Services revenue was up 2.6% to $84 million, as that segment of Snap-on’s business continues to grow in importance. Commercial & Industrial revenue was down fractionally to $335 million, Snap-on Tools revenue was off 1.5% to $406 million, and Repair Systems and Information revenue was up 1.7% to $349 million.

Gross margins declined in the second quarter, falling 122 basis points (bps) to 49.8%, while operating margin excluding Financial Services revenue fell fractionally to 20% of revenue. Margin growth isn’t necessary for Snap-on to grow earnings as its revenue expansion has largely taken care of that in recent years.

Diluted earnings-per-share (EPS) came to $3.22 in Q2, up from $3.12 in the year-ago period. The company earned $6.38 in the first half of the year, and we reiterate our expectation for $12.50 in 2019.

Snap-on’s primary competitive advantage is in its very broad and deep assortment of specialty tool offerings. The company’s global reach and in-house financing provide a unique consumer offering that is difficult to find with smaller, less specialized competitors.

Snap-on is not the most recession-resistant stock in this month’s Top 10. When the economy contracts, consumers are likely to delay purchasing tools, and they may even default on their payments — which would hurt Snap-on’s financing business. The company’s earnings dropped significantly during the Great Recession of 2007-2009, although its earnings continued to cover its steadily growing dividend.

Given Snap-on’s excellent track record and long growth runway, we believe the company is capable of growing earnings at 8% annually through full economic cycles. The company is also undervalued, trading at a price-to-earnings ratio (P/E) of 12.

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