SNAP-ON INC. $44 (New York symbol SNA; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) makes and distributes hand tools to automotive mechanics, mainly through a fleet of franchised vans that visit garages. This business supplies about 45% of its revenue.
The company also sells power tools and storage chests (45% of revenue) and provides financing to dealers (10% of revenue).
Snap-On’s revenue grew at a compound annual rate of 3.4%, from $2.1 billion in 2001 to $2.4 billion in 2005. The slow economy cut profits from $1.84 a share (total $106.7 million) in 2001 to $1.35 a share ($78.7 million) in 2003. A successful restructuring plan raised earnings to $1.40 a share ($81.7 million) in 2004, and to $1.65 a share ($95.7 million) in 2005.
In May 2006, Snap-On agreed to pay $38 million to settle a class-action lawsuit launched by some of its franchisees. That cut its earnings in the second quarter of 2006 by 56.5%, to $0.20 a share (total $11.8 million) from $0.46 a share ($26.6 million) a year earlier. Sales improved 5.4%, to $624.4 million from $592.4 million.
The company aims to expand sales with several initiatives, such as expanding in overseas markets like Asia where increasing demand for new cars should spur tool sales. It also plans to make more computer-based diagnostic products, which generate higher profits for it than regular tools.
These moves will cost Snap-On roughly $17 million in 2006. But they should lead to annual savings of around $13 million. That will help the company cope with rising steel and energy costs.
These savings will also help Snap-On fund its aggressive stock buybacks, which help offset the shares it issues under its employee stock option plan. It repurchased $58.3 million of its stock in the first six months of 2006.
Snap-On should benefit from the slowdown in new car sales, which should increase the need for mechanical services. But the stock is expensive at 23.3 times its likely 2006 earnings of $1.89 a share. The $1.08 dividend yields 2.5%.
Snap-On is a hold.