s nap - on i ncorporated october 31, 2013 1 michael derenzo dan kleeman charlie penicook
TRANSCRIPT
SNAP-ON INCORPORATEDOctober 31, 2013
1
Michael DeRenzoDan KleemanCharlie Penicook
AGENDA• Introduction• Company Overview• Macroeconomic Outlook• Relevant Stock Market Prospects• Financial Analysis• Valuation• Recommendation
2
SNAP-ON IN RCMP & COMPANY OVERVIEW
3
Snap-on Incorporated
• Founded in 1920 and headquartered in Kenosha, Wisconsin• Snap-on operates in four primary business segments– Commercial & Industrial Group– Snap-on Tools Group
– Primarily serves vehicle repair technicians– Repair Systems & Information Group
– Other professional vehicle repair customers– Financial Services
– Serves customer base across other business segments• Distributes product line to over 130 countries with a very
diversified product base
Source: Capital IQ, Form 10-Q 2Q 2013 page 5-6
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
• April 2013: Purchased 100 shares @ $85.20
RCMP Holding
SALES COMPOSITION
4
2012 Net Sales & Operating Earnings Geographical & Product Sales
Commercial & Industrial
Group, 30.35%
Snap-on Tools Group, 41.04%
Repair Systems & Information Group, 23.40%
Financial Services, 5.20%
2012 Net Sales
Commercial & Industrial
Group, 20.66%
Snap-on Tools Group, 28.63%
Repair Systems & Information Group, 33.39%
Financial Services, 17.32%
2012 Operating Earnings
North America, 65%
Europe, 21%
Asia/Pacific, 10%
Rest of the World, 4%
Geography
Tools59%Diagnostics
21%
Equipment20%
Products
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Source: MULTPLE PAGES
COMPANY OVERVIEW
5
Management’s Outlook
• Snap-on’s value creation process– Safety, quality, customer connection, innovation & rapid continuous improvement• Currently focused on geographic and customer diversification– Emerging markets & critical industries (e.g. expanding franchisee network, vehicle
repair garage)• Focused on expanding global financial services operations to improve
financing options franchisees and customers– Management expects financial services to continue to have a meaningful impact
on overall operating earnings
Source: Form 10-Q 2Q 2013 page 4
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
6
MACROECONOMIC OUTLOOK
Source: Bloomberg Terminal, IBISWorld Industry Outlook
• Steel is the largest raw material input that goes into Snap-on’s product lines
• Global price of steel has been in decline over the past two years
• Current steel prices are favorable for Snap-on’s COGS
LME Steel Billet Global Projected Automotive Revenues
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
0
100
200
300
400
500
600
700
12/31/2010 7/19/2011 2/4/2012 8/22/2012 3/10/2013 9/26/2013
USD/
MT
95,000
100,000
105,000
110,000
115,000
120,000
2014 2015 2016 2017 2018 2019
Revenue $ Millions3-month Steel Futures Price
• Automotive exports projected to grow through 2018
• Expected expansion of production capacity in emerging markets
• Growth potential in new automotive sales and automotive repairs
PORTER’S FIVE FORCES
7
Power of Suppliers: Low Substitutes: Low to Medium
Highly concentrated inputs (e.g. steel) Varies widely across business segments (i.e. commercial tools vs. diagnostics)
Suppliers are subject to market movements and do not have high degree of price control
Highly specialized products have low threat of substitution
Barrier to Entry: Medium Power of Buyers: MediumHigh start up costs, scale of production, proprietary technology in specific business segments Number of choices in tools from multiple distribution channels
Competition: MediumSnap-on does not have any direct competitors that offer the same broad product base
Specific business segments subject to higher degrees of competition
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Source: IBISWorld Operating Conditions
UNDERSTANDING MARKET POWER
8
Strengths Weaknesses- Broad portfolio catering
to large customer base- Strong revenue coupled
with steady margin improvement
- Independent financing arm
- Heavy concentration in US market
- Market saturation
Opportunities Threats- Improving housing
construction market in the US
- Strong outlook for the global automotive retail
- Increasing complexity of automobiles
- Modified growth forecasts in emerging markets
- Vehicle quality- Uncertainty regarding
the economic recovery in EuropeFINANCIAL
ANALYSISFINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Source: MarketLine Industry Analysis
FINANCIAL ANALYSIS - RATIOS
9FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
2009 2010 2011 2012Current Ratio 2.15 1.91 2.20 2.37Quick Ratio 1.73 1.46 1.50 1.63Cash Ratio 0.88 0.63 0.33 0.39
Liquidity Ratios
2009 2010 2011 2012Operating Profit Margin 9.87% 12.10% 13.46% 13.95%Net Margin 5.68% 7.12% 9.68% 10.42%ROA 4.29% 6.17% 9.51% 10.16%ROE (Book Value) 10.28% 13.28% 17.86% 16.83%EBIT/Tangible Assets 0.18 0.26 0.37 0.36 EBIT/EV 0.11 0.16 0.21 0.21
Profitability Ratios
2009 2010 2011 2012Debt/Assets 26.85% 21.00% 9.42% 4.93%Debt/Equity 64.30% 45.20% 17.70% 8.16%Interest Coverage 4.89 5.83 6.40 7.59
Leverage Ratios
2009 2010 2011 2012A/R Turnover 5.58 5.83 5.94 5.66Days Sales Outstanding 65.46 62.58 61.46 64.48Fixed Asset Turnover 6.82 7.64 8.11 7.87Total Asset Turnover 0.76 0.87 0.98 0.98
Turnover Ratios
FINANCIAL ANALYSIS – DUPONT
10FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
2009 2010 2011 2012Tax Burden 70.08% 64.89% 76.96% 76.97%Interest Burden 82.12% 90.66% 93.44% 97.07%Operating Profit Margin 9.87% 12.10% 13.46% 13.95%Asset Turnover 0.76 0.87 0.98 0.98Leverage 2.40 2.15 1.88 1.66ROE 10.28% 13.28% 17.86% 16.83%
DuPont Analysis
0.00
0.50
1.00
1.50
2.00
2.50
3.00
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
2008 2009 2010 2011 2012 2013
DuPont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
ROE
Asset Turnover
Leverage
SNAP-ON DIVIDEND STABILITY
11
• Snap-on has not missed a quarterly dividend payment since 1939
• Annualized dividend growth rate of 4.83% from 1985 - present
Date DividendAug-13 0.38$ Aug-12 0.34$ Aug-11 0.32$ Aug-10 0.30$ Aug-09 0.30$ Aug-08 0.30$ Aug-07 0.27$ Aug-06 0.27$ Aug-05 0.25$ Aug-04 0.25$ Aug-03 0.25$ Aug-02 0.24$ Aug-01 0.24$ Aug-00 0.24$ Aug-99 0.23$ Aug-98 0.22$ Aug-97 0.21$ Aug-96 0.20$ Aug-95 0.18$ Aug-94 0.18$ Aug-93 0.18$ Aug-92 0.18$ Aug-91 0.18$ Aug-90 0.18$ Aug-89 0.18$ Aug-88 0.17$ Aug-87 0.13$ Aug-86 0.11$ Aug-85 0.10$
Dividend History
Source: Yahoo! Finance
RECENT STOCK PERFORMANCE
12
20 & 200 Day Moving Average Stock Chart
• Snap-on’s stock price has consistently been above the 200 day moving average• While the stock has fallen below the 20 day moving average several times over the
past couple months, the stocks continued rally suggests an overall up trend
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Metric ValueCurrent Price 101.34$ Trailing P/E 17.60Forward P/E 15.64Dividend Yield 1.5%Market Cap ($ Millions) 5,890$
Source: Yahoo! Finance
VALUATION – WACC CALCULATION
13
Risk-Free Rate 3%Market Risk Premium 6%5-Year Beta 1.24
CAPM Cost of Equity 10.45%
Snap-on Inc. CAPM
Interest Expense as a % of Debt 5.56%Weighted Average Interest Rate 6.36%Average 5.96%
Snap-on Inc. Pre-Tax Cost of Debt
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Current Share Price 101.34$ Shares Outstanding 58.22 Market Value of Equity 5,900$
Debt 970.4
Precent Equity 85.88%Precent Debt 14.12%
Cost of Debt 5.96%Tax Rate 31.68%After Tax Cost of Debt 4.07%Cost of Equity Weightings
CAPM Cost of Equity 10.45% 65%Annual Realized Returns 13.32% 35%
Cost of Equity 11.45%
WACC 10.41%
Snap-on Inc. WACC Caculation
VALUATION – DCF
14FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
2012 2013 2014 2015 2016 2017 TerminalNet Income 341 399 458 483 504 Depreciation 50 53 56 58 61 Capex (77) (73) (70) (67) (67) Changes in Net Working Capital 73 (78) (65) (59) (55) Free Cash Flow 387 301 378 416 443 6,346 Present Value of Free Cash Flow 351 247 281 280 270 3,868
Discount Rate 10.41%Terminal Value Growth Rate 3.2%
Implied Enterprise Value 5,297 Less Debt (970) Implied Market Cap 4,326
Shares Outstanding 58.22 Implied Share Price 74.31$
Discounted Cash Flow Analysis Snap-on Inc.
VALUATION – COMPARABLES COMPANY ANALYSIS
15FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Target Company Ticker Symbol (Exchange)
Price at 10/30/13 Close
Shares Outstanding (millions) Equity Value
Enterprise Value
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA Forward P/E
Snap-on Inc. SNA (NYSE) 101.34$ 58.22 5,899.96$ 6,709.52$ 2.96x 2.13x 9.58x 16.19x
Comparable CompaniesStanley Black & Decker Inc. SWK (NYSE) 78.73$ 156.55 12,324.85$ 16,449.53$ 1.76 1.44 10.21 15.07 Danaher Corporation DHR (NYSE) 72.04$ 694.08 50,001.16$ 51,798.89$ 2.36 2.62 11.61 19.48 Emerson Electric Co. EMR (NYSE) 66.90$ 721.15 48,244.94$ 50,685.12$ 4.73 2.03 9.96 17.62 Genuine Parts Company GPC (NYSE) 79.10$ 154.86 12,249.68$ 12,772.49$ 3.89 0.87 9.70 17.77 Newell Rubbermaid Inc. NWL (NYSE) 29.59$ 290.15 8,585.54$ 10,029.22$ 3.92 1.73 10.63 15.19 Pentair Ltd. PNR (NYSE) 67.15$ 204.32 13,719.95$ 15,840.78$ 2.20 2.08 11.58 17.67 SPX Corporation SPW (NYSE) 91.09$ 46.59 4,244.29$ 5,339.30$ 1.91 1.05 11.44 18.35 W.W. Grainger, Inc. GWW (NYSE) 270.06$ 69.56 18,785.54$ 18,754.06$ 5.56 1.88 11.39 21.23
Comparable Statistics High 5.56 2.62 11.61 21.23 Median 3.12 1.80 11.01 17.72 Low 1.76 0.87 9.70 15.07 Mean 3.29 1.71 10.82 17.80
Multiple Snap-on Statistic Low Median High Mean Low Median High Mean Price/Book Value 34.21$ 1.76 3.12 5.56 3.29 60.20 106.86 190.34 112.64 Forward TEV/Sales 3,155.74$ 0.87 1.80 2.62 1.71 30.70 80.95 125.27 76.10 Forward TEV/EBITDA 700.60$ 9.70 11.01 11.61 10.82 100.09 115.84 123.00 113.48 Forward P/E 6.26$ 15.07 17.72 21.23 17.80 94.36 110.94 132.92 111.44
Multiple Statistics Implied Snap-on Share Price
Multiple WeightImplied Snap-on Stock Price
Price/Book Value 25% 106.86 Forward TEV/Sales 25% 80.95 Forward TEV/EBITDA 25% 115.84 Forward P/E 25% 110.94 Snap-on Implied Stock Price 103.65$
COMPARABLES STOCK CHART
16FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
• Snap-on’s recent stock performance has been well above its peer group average and the return on the S&P 500
• Snap-on’s stock movement is highly correlated with the global manufacturing output and the overall global economic growth
Source: Yahoo! Finance
ALTERNATIVE DCF CALCULATION
17
Non-current AssetsProperty and equipment - net 1.4 1.0 1.0 2.0 2.4 2.8 3.1 3.3 3.5 Investment in Financial Services - - - - - - - - - Deferred income tax assets 14.6 15.8 5.4 0.2 1.9 2.2 2.4 2.6 2.8 Long-term contract receivables - net 59.8 345.7 431.8 494.6 580.7 667.8 734.6 793.3 848.9 Long-term finance receivables - net 177.9 110.9 156.0 182.3 242.0 278.2 306.1 330.6 353.7 Goodwill - - - - - - - - - Other intangibles - net - - - - - - - - - Other assets 1.0 0.5 1.0 1.1 1.5 1.8 2.0 2.1 2.3
Total Non-current Assets 254.7 473.9 595.2 680.2 828.5 952.8 1,048.1 1,131.9 1,211.2
Total Assets 530.8 850.6 923.8 1076.3 1,289.1 1,482.5 1,630.7 1,761.2 1,884.5
Liabilities and Shareholder's EquityCurrent Liabilities
Notes payable and current maturities of long-term debt - - - - - - - - - Accounts payable 0.5 16.5 0.6 0.4 1.0 1.1 1.2 1.3 1.4 Intersegment payables 0.7 6.7 10.8 14.1 15.5 17.8 19.6 21.2 22.6 Accrued benefits 0.3 - - - - - - - - Accrued compensation 3.2 3.3 3.9 3.4 3.9 4.5 4.9 5.3 5.7 Franchisee deposits - - - - - - - - - Other accrued liabilities 85.7 132.0 31.1 46.9 58.1 66.8 73.5 79.3 84.9
Total Current Liabilities 90.4 158.5 46.4 64.8 78.4 90.2 99.2 107.1 114.6
Non-Current LiabilitiesLong-term debt and intersegment long-term debt 227.3 536.0 710.3 827.2 967.8 1,113.0 1,224.3 1,322.2 1,414.8 Deferred income tax liabilities - 0.1 0.1 1.4 1.0 1.1 1.2 1.3 1.4 Retiree health care benefits - - - - - - - - - Pension liabilities - - - - - - - - - Other long-term liabilities 7.5 21.6 25.0 17.6 29.0 33.4 36.7 39.7 42.4
Total Non-current Liabilities 234.8 557.7 735.4 846.2 997.8 1,147.5 1,262.2 1,363.2 1,458.6
• A large portion of Snap-on’s long term debt is directly attributable to the expansion of the financing division
• Snap-on finances the growth of its financing division through its long-term debt• As Snap-on grows its financing division, its accounts receivables must grow
proportionally
ALTERNATIVE DCF CALCULATION CONTINUED
18
2012 2013 2014 2015 2016 2017 TerminalNet Income 341 399 458 483 504 Depreciation 50 53 56 58 61 Capex (77) (73) (70) (67) (67) Changes in Net Working Capital 73 (78) (65) (59) (55) Free Cash Flow 387 301 378 416 443 6,346 Present Value of Free Cash Flow 351 247 281 280 270 3,868
Discount Rate 10.41%Terminal Value Growth Rate 3.2%
Implied Enterprise Value 5,297 5,297 Less Debt (970) (294) Implied Market Cap 4,326 5,003
Shares Outstanding 58.22 58.22 Implied Share Price 74.31$ 85.94$
Discounted Cash Flow Analysis Snap-on Inc.
Offsetting Receivables
DECISION DRIVERS
• Strengths– Extremely diversified product base– Good positioning of procurement of raw materials– Great growth prospects for financing arm– Strong dividend history– Poised to capitalize on global manufacturing prospects
• Concerns– Anemic growth in emerging markets and Europe where Snap-on has either a
larger portion of its current sales or is looking to expand– Credit risk from financees– Drastic improvements in diagnostic technology from competitors– Leverage concern for financing arm
19FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
RECOMMENDATION
• Valuation– Current Price $101.34 per share– Analyzed Price:
– DCF Valuation: $74.31 - $85.94– Comps Valuation: $103.65– Weighted Valuation: $94.24
• Recommendation– HOLD
20FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Weights Stock PriceDCF - With Debt Load 20% 74.31$ DCF - Modified Debt Load 20% 85.94$ Comparables Analysis 60% 103.65$
94.24$
Valuation Summary
QUESTIONS
21