SNA - Snap-on: Might Be Rewarding In The Coming Times

2023-10-27 06:37:20 ET

Summary

• SNA announced decent Q3 FY23 results with sales growth and improved margins.
• SNA has a strong balance sheet, attractive valuation, and a bullish technical setup, making it a great buying opportunity.
• The company's strong margins and ability to perform in adverse conditions make it an attractive investment option.

Snap-on Incorporated ( SNA ) manufactures equipment and system solutions. SNA recently announced decent Q3 FY23 results. I believe SNA has everything, and it can be rewarding in the coming times. Its margins are solid; it has a low valuation, a healthy balance sheet, and a perfect technical setup. Hence, I assign a buy rating on SNA.

Financial Analysis

SNA recently posted its Q3 FY23 results . The sales for Q3 FY23 were $1.1 billion, a rise of 5.1% compared to Q3 FY22. Its Snap-on Tools Group and Repair Systems & Information Group segments experienced good growth, which led to increased sales for the company. The sales from the Snap-on Tools Group segment grew by 3.7% in Q3 FY23 compared to Q3 FY22. This segment experienced high demand in the U.S., which benefitted its sales. The sales from the Repair Systems & Information Group [RS&I] segment grew by 4.3% in Q3 FY23 compared to Q3 FY22. Increased sales of under-car equipment were the major reason behind increased sales in the RS&I segment. Its gross profit margin for Q3 FY23 was 49.8%, which was 48.3% in Q3 FY22. The improvement in margin was due to a better pricing policy and lower material costs.

The net earnings in Q3 FY23 increased by 8.5% compared to Q3 FY22. The market conditions are not favorable. The interest rates are still high, but still, the company managed to deliver decent results, which is impressive. In addition, with strong quarterly results, its balance sheet also looks strong. Its CFO in Q3 FY23 increased by 119.7% compared to Q3 FY22, and the management used around $135 million in share buybacks and dividend payments, which is a good sign. And even after all the expenses, the company is left with plenty of cash. So, the liquidity and cash position of the company looks strong, and if we look at the debt, it has not increased since the start of the year 2023. So, the company is looking both fundamentally and financially strong.

Technical Analysis

SNA is trading at $250.2. The setup building here is quite favorable for new buyers. The stock first broke the $250 level in May 2021, but the stock failed to sustain that level and started to fall. The stock traded below $250 for two years, and after two years, it again tried to break $250 in January 2023. But it turned out to be a breakout failure, so it shows that $250 was an important level for the stock as sellers were active at that level. But the third time, the stock price gave a breakout above $250 in the month of April, and the breakout was so significant that the price not only broke out of $250 but also broke its all-time high. After giving a breakout, the stock gave a strong up move of around 15%. Now, the stock has once again come around the $250 level, which is a good opportunity for investors who could not buy it at the breakout. The reason I think it is a good opportunity is because the stock price has come for the retest of the breakout level, and whenever the retest is done after a breakout, the stock price generally continues its upward journey. So, looking at the price chart, I am bullish on SNA as I think it can give good returns in the coming times.

Should One Invest In SNA?

In tough market conditions, the positive sales growth was impressive, but what was more impressive was a significant improvement in the margins. The margins of SNA are quite attractive, and if we compare it to its peers, we can see that the margins of SNA are superior to its peers. SNA has a gross profit margin of 51.38%, whereas its peers, like SWK and IEX , have a gross margin of 22.76% and 44.98%. In addition, its valuation also looks attractive. SNA is trading below the sector median and its peers. SNA is trading at a P/E [FWD] ratio of 13.41x compared to the sector median of 18.83x, and its peers SWK and IEX are trading at a P/E of 71.69x and 23.49x. Hence, with strong margins, the ability to perform in adverse conditions, a healthy balance sheet, an attractive valuation, and a bullish technical setup, I think SNA can be a great buying opportunity. So, I assign a buy rating on SNA.

Risk

The United States dollar is the reporting currency for Snap-on's consolidated financial statements. The corporation has certain assets, liabilities, costs, and revenues that are not expressed in U.S. dollars. These assets, liabilities, costs, and revenues are converted into U.S. dollars at the appropriate exchange rates before being included in Snap-on's Consolidated Financial Statements. The Consolidated Financial Statements show how changes in exchange rates between the U.S. currency and other currencies impact the items' U.S. dollar values. The financial situation and operational outcomes of the company have been and may continue to be significantly impacted by large swings in the value of the U.S. dollar or other transactional currencies. Changes in interest rates and inflation in non-US jurisdictions also impact them. It could be challenging to repatriate money earned in some non-US jurisdictions in a way that minimizes taxes.

Bottom Line

Every aspect of this company is looking positive. They have strong margins with a healthy balance sheet and have performed well in adverse market conditions. In addition, its valuation looks attractive, and the technical setup is bullish. Hence, I think it can be a great buying opportunity. Hence, I assign a buy rating on SNA.

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