SNAP-ON INC. $38 (New York symbol SNA; WSSF Rating: Average) makes and distributes tools and storage chests to mechanics, mainly through a fleet of franchised vans that visit automotive garages. This business supplies about half of its revenue.
It also makes equipment and software that mechanics use to diagnose automotive problems, as well as a wide range of non-automotive tools. It gets over 40% of its revenue from overseas customers.
In 2004, the company restructured its manufacturing and distribution. That helped it improve its profit margins, while speeding up deliveries. Faster delivery improves customer satisfaction, and cuts Snap-On’s inventory costs.
These initiatives are now paying off. In its third quarter, Snap-On’s revenue slipped to $567.2 million from $568.8 million a year earlier, mainly due to lower revenues from its financing operations.
Income also fell 7.7%, to $0.36 a share (total $21.0 million) from $0.39 a share ($22.8 million). However, if you exclude unusual tax gains and losses, per-share earnings grew 24.2%, to $0.41 from $0.33.
Snap-On is using most of its cash flow to pay down debt. It recently retired $100 million of long-term notes, which cut its long-term debt in half (to about 0.1 times equity).
Lower interest costs should give it more cash to increase its $1.00 dividend, which now yields 2.6%.
The stock has moved up steadily from $31 in April 2005, and now trades at 24.4 times the $1.56 a share it will likely earn in 2005. Profits in 2006 should climb 17% to $1.83 a share, and the stock trades at 20.8 times that figure. That’s acceptable in light of Snap-On’s strong brand name.
Snap-On is a buy.