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Morningstar | New Product Introductions and Aging Car Fleet Help Snap-on’s First-Quarter Performance

Despite softness in Europe, Snap-on’s adjusted EPS of $3.01 handily beat consensus of $2.90 in the first quarter. Revenue in the quarter excluding financial services was $922 million versus consensus of $933 million. Both Commercial and Industrial revenue and Repair Systems & Information revenue declined 2.7% year over year. These declines were attributed to currency translation effects and weakness in Europe as Brexit concerns impacted Snap-on's customers' buying decisions. The Tools group achieved 1.4% revenue growth in the quarter due in part to strong organic growth in the United States offset by currency headwinds in foreign markets. Across all three business units, new product introductions bolstered revenue and margins. Taking these results into account and incorporating the impact of the time value of money, we are increasing our fair value estimate to $142 from $141.

On a year-over-year basis, revenue excluding financial services was down 1.5% in the first quarter. The decline included a $26.1 million unfavorable currency impact offset by $12.3 million organic revenue growth. Financial Services revenue and operating earnings increased 3.1% and 9.1%, respectively, in the quarter. The segment benefited from increases in originations combined with lower provisions for credit losses. On an adjusted basis, which excludes the impacts from various legal matters, consolidated operating margin before financial services increased to 19.1% from 19.0% in the prior year’s first quarter.

Snap-on’s first-quarter results were a tale of mixed geographic performance. While North American revenue was up 2.2% year over year across all three segments, Europe and all other geographies were down 9.2% and 9.0%, respectively. North America continues to be the largest geographic segment, representing 70% of sales. Although management has historically been bullish on its global prospects, we question if its sales and marketing strategy resonates outside of North America.

During the fourth-quarter call, management indicated business was down in China despite sales wins with COMAC (Commercial Aircraft Corporation of China). Consistent with what it reported in the fourth quarter, management indicated that it was having better success in India than in other parts of Asia. Going forward, we will be carefully watching for progress in Snap-on’s operations outside of North America.

Much of Snap-on’s success can be attributed to its ability to continuously innovate and introduce new products that address growing vehicle complexity. In the first quarter, it entered the motorcycle diagnostic market with its new P1000 handheld device, which has been well received by customers. It also recently introduced a school bus diagnostic kit with a variety of unique capabilities. For its critical industries customers--like aviation and the military--there has been strong adoption of Snap-on’s automatic tool controls and sophisticated torque systems. Consistent with our larger body of industrials research, Snap-on’s productivity enhancing offerings are resonating with end-users. This is especially true in North America where unemployment is low, and employers are lamenting they are unable to fill available technician jobs. While this will benefit Snap-on in the near term, we believe the company may have to increase research and development expenditures to keep its momentum going. Concurrently, it may need to enhance its sales and marketing activities overseas, which could hurt future profitability.