Topic: Value Stocks

Cost-cutting and higher-profit products pay off for this auto toolmaker

New automotive technologies should help drive sales of higher-profit-margin products for this toolmaker, which saw its earnings in the latest quarter rise on the success of its cost-cutting efforts.

Still, the company’s financing unit, which provides loans to auto repair shops, saw its delinquency rate creep higher.

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SNAP-ON INC. $160 (New York symbol SNA; makes tools for auto mechanics and sells them through a fleet of franchised vans that visit garages. It also makes specialized tools for industrial customers.

The company stands to gain from several long-term trends. For example, new automotive technologies should spur demand for Snap-On’s diagnostic systems. Rising sales of new cars in developing countries will also require more maintenance and repair services.

Snap-On last raised its quarterly dividend by 15.9% with the December 2018 payment, to $0.95 a share from $0.82. The new annual rate of $3.80 yields 2.4%.

In the three months ended December 31, 2018, revenue from its tools business fell 2.3%, to $952.5 million from $974.6 million a year earlier. The lower revenue was mainly due to lower demand from car dealerships and independent repair shops.

Value Stocks: Revenues are down but earnings are up thanks to cost-cutting

However, earnings per share jumped 12.6%, to $3.03 from $2.69. That’s largely due to savings from an ongoing cost-cutting plan and a shift to higher-margin products. That topped the consensus estimate of $3.02.

Snap-On also provides financing for the auto repair shops that buy its tools. The credit quality of the company’s U.S. loan portfolio is worsening. The delinquency rate at December 31, 2018, was 1.8% compared to 1.5% a year earlier; the international delinquency rate was unchanged at 0.8%.

That’s probably why the stock is down roughly 10% since the start of 2018. Rising interest rates could increase credit losses for the company’s financing unit, which mainly lends to auto repair shops. The financing business supplies about 25% of Snap-On’s operating earnings.

Recommendation in Dividend Advisor: Snap-On is a hold.


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