Snap in (New York Stock Exchange: SNA) continues to increase steadily. The company reported impressive results in the third quarter. I think the company is well positioned to capitalize on auto repair tailwinds in the near term. I think you can hold and increase your supply in the long run.
The company’s organic revenue growth has started to accelerate since I last covered it. He combined this outperformance with a strong dividend increase of 14.1%. Overall, I stand by my view that this is a good defensive dividend growth stock.
Snap-on Third Quarter Results
Snap-on reported continued strong demand in your third quarter results. The company boosted its EPS by an impressive 16% from last year. Its key tools segment increased its organic sales by 7.4% year over year.
The company reported especially impressive results in North America. Sales in North America grew 11.2% from last year.
But Snap-on’s results were dragged down by weakness in Europe. Europe’s revenue fell 18% from last year. This offset strong growth in North America and the rest of the world.
Part of this was due to unfavorable currency conversion issues. Exchange rate headwinds have been a constant problem for the company. The business reported an impressive revenue growth rate of 10.4% in constant currency.
Most of Snap-on’s metrics are moving in the right direction. The business increased its gross profit and reduced its expenses. Excluding its financing segment, it reduced its operating expenses by 3.2% year over year. This is an impressive performance when inflation is so high.
I am impressed by the organic growth of the company’s top line. This is because Snap-on has been struggling to grow its revenue for some time. From 2016 to 2020, it only increased its top line at a CAGR of 1.2%. Then it suddenly increased its revenue by 18% from 2020 to 2021. So it’s a good sign that the company can beat those results. Overcoming those tough competitions with double-digit organic growth is even more impressive.
What is perspective?
I think Snap-on has a strong outlook even as the general environment deteriorates. In the short term, the company has a strong revenue base. Cars are often a nondiscretionary expense, especially in most of the United States. The auto repair industry is a basic need, regardless of the environment.
New car sales have dropped in recent years due to supply chain constraints. This has caused a increase in average age of cars. In today’s economic downturn, auto repair is more important than ever. So even as the economy is slowing down, Snap-on is reporting a strong demand environment. Management is even increasing production.
But in the long term, there are still some risks. The automotive industry is changing, especially with the increasing adoption of electric vehicles. electric vehicles made up of 5% of U.S. car sales last year, up from 2% in 2019. These cars have different repair and maintenance needs than ICE cars. These trends could hurt Snap-on’s business.
I think Snap-on can weather these headwinds. Management seems to be on top of future trends. They regularly talk about electric and hybrid vehicles on their earnings calls. They are also adding new products and offers to capitalize on these trends.
The enterprise information and repair systems segment is a good example of this. The segment increased its organic sales by a solid 17.2% in the quarter. This was fueled by strong sales of undercar equipment. This equipment is becoming more and more important as cars become more complex. Management provided more details about it on its earnings call.
Collision repair is a star in this era. I think it’s driven by the idea of collision, cars now have that neural network of sensors. So every time, if you just dent the bumper, it’s thousands of dollars to repair, because you have to recalibrate everything and so on.
So the collision shops had to be upgraded to take advantage of that and really be able to not only restore form, but also get things working again. But also, the other businesses that we’re selling through other products like elevators, just basic elevators, which you would think would be the simplest products in the situation, are selling quite well.
So I think it’s in the collision shops, as the situation, but also the repair shops in general are seeing the future, and they’re excited about this. Like I said, I think even dealers are starting to get over the idea, they don’t have cars to sell and are turning to repair.
The auto industry is changing, but I think Snap-on is well positioned to adapt. I think this is important when evaluating it as a long-term dividend growth stock. It is important to ensure that the company is positioned for the long term.
Still a solid valuation
I still believe that Snap-on is trading at a reasonable valuation. The business has a forward P/E of 13.3x and a forward EV/EBITDA of 9.4x. In the last twelve months, the business has generated a ROIC of 14%. These are solid metrics. I believe that this assessment is justified by the fundamentals of the company.
The company has a solid balance sheet. It has $760 million in cash on hand, backed by an $800 million undrawn credit facility. This is offset by just $1.2 billion in debt. This gives Snap-on a healthy debt to EBITDA ratio of 0.9x. Most of the company’s debt carries extremely low interest rates, at a weighted average rate of 3.47%. This is below the current two-year Treasury yield (US2Y). 75% of this debt is not even due until 2048.
I will point out that the business has been experiencing some cash flow headwinds. In the last quarter, the company converted only 49% of its net income into free cash flow. In the past twelve months, Snap-on has generated FCF equal to just 68% of its net income. This is down from their five-year average conversion rate of 107%. Management attributes this to increases in the company’s accounts receivable and inventory. Both are signs of high demand, but I’ll keep an eye on it in the coming quarters.
The company continues to generate strong returns for shareholders. Even with these free cash flow headwinds, your dividend is well covered. The company demonstrated this with another strong dividend hike of 14.1%. Even after these payments, the company has the cash to continue buying back its shares. It has reduced its outstanding shares by almost 2% since the beginning of 2021.
I still believe that this is an unambitious investment. Snap-on is unlikely to post very high long-term growth. But I like the financial profile of the business. I think it is well positioned for the current environment. I continue to believe this is a good buy for a defensive dividend growth portfolio.