On October 22, Snap-on Inc (SNA) reported solid third quarter results driven by excellent sales growth and an improvement in the gross margin. Analysts have been raising their estimates recently, moving the stock to a Zacks #1 Rank (Strong Buy).
Despite a stellar run-up in the share price over the last several weeks, valuation remains reasonable. The company also pays a stable, attractive dividend.
Company Description
Snap-on is a global provider of professional tools, equipment, and related solutions for technicians, vehicle service centers, original equipment manufacturers and other industrial users.
The company primarily operates in 3 business segments:
- Commercial & Industrial Group (36% of sales)
- Snap-on Tools Group (36%)
- Repair Systems & Information Group (29%)
The company is based in Kenosha, Wisconsin. It has a market cap of $2.9 billion.
Third Quarter Results
Snap-on reported third quarter results on October 22.
Third quarter earnings per share was $0.80, an 82% increase from the same quarter in 2009. It beat the Zacks Consensus Estimate by 23%.
The company saw organic sales growth of 13.4%, led by a 21.2% increase in the company’s Commercial & Industrial Group. Organic sales in the Tools Group increased 10.7%, while the Repair Systems & Information Group grew 10.1%.
Meanwhile, the gross margin improved from 44.8% to 46.1% in the third quarter of 2010 due in part to its “Rapid Continuous Improvement” initiatives. Overall, operating earnings increased 45.9%.
Outlook
Following the strong third quarter, analysts increased their estimates for 2010 and 2011.
The Zacks Consensus Estimate for 2010 $3.09, up from $2.88 before the earnings release. This represents 33% EPS growth over 2009. The 2011 estimate currently stands at $3.76, corresponding to 22% annual growth.
Dividend
The company has a solid history of consistently paying a dividend, however, it doesn’t often raise it. Since 2000, the company has increased its dividend 4 times at a compound annual growth rate of just 2.7%. It last raised its dividend in 2007.
Snap-on has a dividend yield of 2.4%.
Valuation
Valuation is reasonable, with shares trading at 16.3x forward earnings, in-line with the industry average. Its price to book ratio of 2.1 is slightly higher than the peer group average of 1.8, but it’s still very sensible.
The Chart
Shares are up over 25% in the last 2 months. It is trading at a 52-week high.
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