Snap-on Inc. $55 - New York symbol SNA

SNAP-ON INC. $55 (New York symbol SNA; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 57.6 million; Market cap: $3.2 billion; WSSF Rating: Average) makes hand and power tools for auto mechanics. The company distributes its products through a fleet of franchised vans that visit garages and service shops. This way, dealers can build long-term relationships with their customers. This business supplies 35% of Snap-On’s total revenue. The company also makes tools and equipment for non-automotive customers, including the construction, electrical and agricultural industries (40% of revenue). Most of the remaining 25% of Snap-On’s revenue comes from computerized diagnostic equipment and software. This business includes Snap-On’s 2006 acquisition of the Business Solutions division of ProQuest Co., which helps car dealers electronically access information about auto parts, warranties and service bulletins. These services help over 35,000 car dealers improve their billing and inventory management systems. In the three months ended March 29, 2008, Snap-On earned $56.6 million, up 48.9% from $38.0 million a year earlier. Earnings per share grew 51.6%, to $0.97 from $0.64. Most of the gain came from Snap-On’s overseas operations, which now provide 45% of its revenue. Rising car sales in Europe and Asia should increase long-term demand for Snap-On’s products. However, revenue in the quarter rose just 2.3%, to $721.6 million from $705.7 million. Favorable currency exchange rates contributed $33.2 million to revenue in the latest quarter. Also, lower sales of certain tools in the United States offset strong demand for Snap-On’s industrial products. The company needs steel and other metals to make its products, and rising costs for certain raw materials could weigh on its earnings growth. However, savings from a recent restructuring plan will help it cope with rising input costs. Snap-On’s long-term debt of $502.7 million is a reasonable 1.8 times its annual cash flow. That gives it plenty of room to make acquisitions, or expand spending on new product development. The company will probably earn $3.55 a share in 2008, which implies a p/e of 15.5. It also trades at 1.1 times its sales of $48 a share. The $1.20 dividend yields 2.2%. Snap-On is a buy.

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