Financial Services

Report
By Bradley Coyne, Kushal Chukkapalli (KC), Hari Vijayan.
November 6, 2014
Agenda

Introduction

Business

Recent Financial Performance

Macroeconomic Review

Management Philosophy

Financial Analysis

Financial Valuation

Recommendation
Introduction

Leading global innovator, manufacturer and marketer of tools and
equipment, diagnostics and repair, and system solutions for professional
users performing critical tasks.

Head-quarters in Kenosha, WI. Employee strength of 11300 people.

Products and services include hand and power tools, tool storage,
diagnostic software, information and management systems, shop
equipment, vehicle repair solutions and services in various Industrial
segments.

Presence in more than 130 countries with 64% of sales in US.

Has never skipped a dividend since 1939.
Holdings : We hold 100 shares purchased at $85.20 on April 2013.
Currently valued at $134.35 per share with a market value of
$13,435 as of yesterday.
Source: 2013 10-K Page 4
Basic Business Segments of
the company
Snap-on Tools Group
Commercial & Industrial
Repair Systems & Information
Financial Services
Source: 2013 10-K Page 27
Basic Business Segments

Snap-on Tools Group supports professional automotive
service technicians with innovative products and financing
solutions.

The Repair Systems & Information Group provides
professional vehicle repair customers with a wide range of
diagnostics, undercar equipment and repair information and
systems solutions through both direct and distributor
channels.

Financial Services consists of the business operations of
Snap-on Credit, Snap-on's wholly owned finance subsidiary in
the U.S. They provide financing option to franchisees, direct
and indirect customers.

The Commercial & Industrial Group serves professionals in
critical industries and emerging markets with a broad range
of productivity solutions delivered through both direct and
distributor channels.

Industries served include aviation and aerospace,
agriculture, construction, military and government, mining,
natural resources, and power generation.
Source: 2013 10-K Page 27
Business

Distribution channels: mobile van, company direct sales,
distributors, e-commerce.

Major products and services: Snap-on, ATI, BAHCO line of
tools, Blackhawk collision repair equipment, CDI torque
tools, etc.

Depends heavily on steel as the raw material.

Owns 7.2 million sq.ft of facilities, 74 % of which is owned.

Owns about 700 patents in U.S and 1500 patents
internationally.

Main competitors : Genuine Parts Company, Stanley Black
and Decker, W.W. Grainger, Inc., Emerson Electric Co., etc.
Source: 2013 10-K Page 6,7,8,10
Recent Financial Performance

Revenues of $3056.3 million in 2013.

Net earnings of $359.3 million in 2013.

Last quarter revenues: $806.3 million, a 9% increase from
2013.

Last quarter earnings: 106.7 million, a 22% increase from
2013.

58,115,776 shares of common stock are outstanding.

Potential headwinds could result from the European
economy and fluctuating US military spending

Growth drivers include enhancing the franchise network,
expanding repair shop owners and managers, extending to
critical industries and building in emerging markets
Source: CEO Nick Pinchuk’s statement in 2014 Q3 “Comments call”
Source : Bloomberg : SNA US Equity
Contribution of business segments
Net Sales
Operating Earnings
5%
Snap-on Tools
18%
37%
30%
20%
Repair Systems &
Information
Commercial &
Industrial
Financial Services
28%
Source: 2013 10-K Page 26
34%
28%
Product and geographical diversity
Product Diversity
Geographical Presence
16%
22%
21%
Tools
Diagnostic & Repair
Source: 2013 10-K Page 5
20%
57%
64%
Equipment
USA
Europe
All others
Macroeconomic review

The company has secured an ample supply of both bar and
coil steel (its principle raw materials) from its suppliers, for
the near future to meet with material demands.

Steel pricing and availability issues are not going to create
any significant impact in 2014.

The company holds over 700 patents in US and 1500 patents
internationally.

No single patent represents a significant portion of the
company’s revenue.

The company does not foresee any environmental protection
laws affecting it in the near future

Energy and fuel prices can significantly affect the company’s
revenue generation. Higher fuel prices might slow down
growth.

36% of revenues come internationally. Revenue generation
can be significantly affected by the economic conditions in
non-US markets.
Source: 2013 10-K Page 10,11, wikiwealth.com/sna
Porter’s 5 forces
Power of Suppliers : Low
Does not depend on any significant customer
Raw materials are elastic in demand
Substitutes : Medium
Many products are highly specialised
Diagnostic and Repair is Vulnerable
Competition : Medium
Few strong competitors do exist
No competitor that scales all operations or
products
Barriers to entry : Medium
Patent Protection
Medium to High cost of entry
Global market can pose threat
Power of Buyers : Medium
Numerous options are available
Inelastic nature of demand
SWOT analysis
Strengths
Weaknesses
Technological Prowess – R&D investments
Customer Loyalty
Cost Advantages in many niche products
Financing segment helps in maintaining franchisees
Bad acquisitions in past
Operations are diversified but not scaling
Seasonal sales fluctuations
Inefficient foreign currency management
Threats
Opportunities
Emerging markets and Geographical Diversification
Invest more in R&D to maintain advantage
International competition is intensifying
Product costs are reducing globally
Uncertainty about the U.S military spending
Changes in economic policies
Weak European economy
Management Philosophy

CEO -Nicholas T. Pinchuk

No new changes in management in the past 3 years

Implementing a value-creation process throughout the company
focusing on safety, quality, customer connection, innovation and
rapid continuous improvement

Executive compensation is competitive to the industry peers,
with a higher percentage of pay-at-risk compensation.

Looking forward to developing and expanding customer base in
adjacent markets and additional geographies.

Trying to enter new and riskier industries in future.
Source: 2014 Proxy statement Page 20,26, 2013 10-K Page 26
Expectations Forward
The Commercial & Industrial Group
Invest in emerging market growth initiatives.
Reduce structural and operating costs through RCI and restructuring.
Tools
Improve franchisee productivity, profitability, and commercial health.
Expand market coverage and penetration;
Invest in new product innovation and Increase operational flexibility.
The Repair Systems & Information Group
Upgrade technology, expand product range, integrate solutions and
increase market penetration
Financial Services
Deliver products and services that attract and sustain profitable
franchisees, improve productivity levels, and maintain a healthy
portfolio performance.
Source: 2013 10-K Page 26,27
Financial Analysis- Ratios
Current Ratio
Quick Ratio
Liquidity Ratios
2009
2010
2011
2012
2013
2.27
2.00
2.62
2.83
2.51
1.89
1.63
1.96
2.15
1.90
A/R Turnover
Days Sales Outstanding
Inventory Turnover
Inventory Days
A/P Turnover
Days Payable Outstanding
Cash Conversion Cycle
Fixed Asset Turnover
Total Asset Turnover
Turnover Ratios
2009
2010
2011
2012
2013
5.39
6.11
6.30
6.11
5.94
67.72
59.76
57.98
59.72
61.47
4.12
4.66
4.24
3.92
3.78
88.66
78.30
86.15
93.21
96.64
10.62
10.59
11.20
11.59
10.62
34.38
34.46
32.58
31.49
34.35
121.99 103.60 111.55 121.44 123.76
6.96
7.80
8.44
8.26
8.25
0.70
0.72
0.81
0.79
0.79
Debt/Assets
Interest Coverage
Debt/EBITDA
Debt/Capitalization
Leverage Ratios
2009
2010
2011
2012
2013
30.95% 31.39% 26.79% 25.00% 23.65%
5.26
6.05
7.76
9.25
10.45
3.28
2.90
1.79
1.64
1.47
0.45
0.45
0.39
0.35
0.31
Financial Analysis- Ratios
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
EBIT/Tangible Assets
EBIT/EV
Profitability Ratios
2009
2010
2011
10.36% 12.36% 15.95%
5.80% 7.05% 8.80%
4.17% 5.18% 7.73%
11.01% 13.74% 18.34%
Greenblatt Numbers
2009
2010
2011
16.99% 17.82% 21.49%
2.83%
3.69%
5.40%
2012
16.66%
10.08%
8.06%
17.30%
2012
21.66%
5.88%
2013
18.11%
11.22%
8.75%
16.88%
2013
23.10%
6.68%
Greenblatt’s Ratios
0.3
0.25
0.2
0.15
0.1
0.05
0
2009
2010
2011
EBIT/Tangible Assets
2012
EBIT/EV
2013
DuPont Analysis
100.00%
3.00
90.00%
2.50
80.00%
70.00%
2.00
Interest Burden
60.00%
50.00%
1.50
40.00%
Operating Profit Margin
ROE
Asset Turnover
1.00
30.00%
20.00%
0.50
10.00%
0.00%
2008
Tax Burden
2009
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2010
2011
2012
DuPont Analysis
2009
2010
70.37% 70.39%
81.45% 82.74%
10.36% 12.36%
0.70
0.72
2.64
2.66
11.01% 13.74%
2013
2011
69.51%
85.94%
15.95%
0.81
2.37
18.34%
2012
68.75%
88.61%
16.66%
0.79
2.15
17.30%
0.00
2014
2013
68.38%
89.73%
18.11%
0.79
1.93
16.88%
Leverage
Source : Bloomberg : SNA US Equity
Recent Stock Performance
140
70.00%
120
60.00%
50.00%
100
40.00%
80
30.00%
60
20.00%
10.00%
40
0.00%
20
-10.00%
0
-20.00%
2009
2010
2011
2012
2013
2014
Close Price as of Beginning of Year
Close Price as of End of Year or Current Date
Yearly Dividend Paid
Return
Yearly Stock Returns
2009
2010
2011
Close Price as of Beginning of Year
30.18
42.86
57.97
Close Price as of End of Year or Current Date
42.26
56.58
50.62
Yearly Dividend Paid or Dividend Paid Year to Date
1.2
1.22
1.3
Return
44.00% 34.86% -10.44%
Source : http://finance.yahoo.com/echarts?s=SNA+Interactive#
2012
51.24
78.99
1.4
56.89%
2013
80.86
109.52
1.58
37.40%
2014
108.55
134.35
1.32
24.98%
Valuation - WACC
Discount Factor Calculation
Capital Structure
Shares Outstanding
Current Stock Price
Total Market Value of Equity
Total Debt
Total Capitalization
58.107602
134.35
7,807
972
8,779
Debt-to-Total Capitalization
Equity-to-Total Capitalization
11.07%
88.93%
Beta
Risk-Free Rate
Stock Market Return
Market Risk Premium
E[R] (CAPM)
1.00
2.31%
7.34%
5.03%
7.34%
Cost of Debt
Tax Rate
After-tax Cost of Debt
5.85%
32%
3.98%
WACC
Risk Premium
Discount Rate
ROE Averaged over past 5 years
Weight put on E[R] Calculation
Weight put on Return Calculation
Cost of Equity
9.21%
1.00%
10.21%
Equity Risk Premium Source: Aswath Damodaran, Stern School of Business, NYU
32.54%
90%
10%
9.86%
Discounted Cash Flow
($ in millions)
2014E
2015E
2016E
2017E
2018E
EBIT
687
801
930
1,085
1,276
Less: Income Taxes @ 32%
(198)
(233)
(273)
(321)
(380)
EBIAT
489
567
657
764
896
61
65
70
75
80
(78)
(84)
(90)
(96)
(103)
Less: Increase In NWC
(135)
(140)
(154)
(166)
(181)
Unlevered Free Cash Flow
336
409
483
577
692
Add: Depreciation
Less: Capital Expenditures
Terminal Growth Rate
3.50%
Terminal Value
10,673
Discount Rate
PV of Free Cash Flow
10.21%
305
337
361
391
Implied Enterprise Value
Enterprise Value
6,990
8,384
8,384
Less: Debt
972
Add: Cash
218
Implied Equity Value
7,630
Shares Outstanding
58.108
Current Stock Price
$134.35
Total Fair Value Stock Price
$131.30
Enterprise Value
Company Name
Snap-on Incorporated (NYSE:SNA)
EBITDA
EBIT
Price
EPS
NTM Enterprise Value
Tangible BV
Forward Total
Revenue
NTM
Forward
P/E
Forward
EBITDA
11.7x
12.9x
19.5x
6.2x
2.5x
10.7x
17.6x
8.9x
13.9x
43.6x
4.0x
1.2x
7.8x
15.8x
Dover Corporation (NYSE:DOV)
Danaher Corp. (NYSE:DHR)
Emerson Electric Co. (NYSE:EMR)
SPX Corporation (NYSE:SPW)
Genuine Parts Company (NYSE:GPC)
W.W. Grainger, Inc. (NYSE:GWW)
Pentair plc (NYSE:PNR)
Stanley Black & Decker, Inc. (NYSE:SWK)
28.7x
7.9x
12.7x
9.9x
9.7x
12.9x
11.1x
10.0x
11.0x
125.9x
10.3x
16.1x
11.9x
12.6x
14.7x
12.5x
12.0x
15.1x
NM
14.3x
21.0x
18.0x
8.1x
21.7x
21.7x
19.7x
21.5x
NM
NM
36.3x
39.5x
NM
7.3x
6.0x
NM
NM
1.3x
1.8x
2.7x
1.9x
1.0x
1.0x
1.6x
2.1x
1.6x
8.1x
8.3x
11.9x
9.1x
9.1x
11.6x
10.0x
11.4x
10.6x
32.8x
15.4x
20.4x
16.1x
15.1x
20.0x
18.8x
15.6x
15.6x
High
Low
Mean
Median
28.7x
7.9x
12.3x
10.5x
125.9x
10.3x
24.5x
13.3x
43.6x
8.1x
21.1x
21.0x
39.5x
4.0x
18.6x
7.3x
2.7x
1.0x
1.6x
1.6x
11.9x
7.8x
9.8x
9.6x
32.8x
15.1x
18.6x
16.0x
Blount International Inc. (NYSE:BLT)
ARI Network Services Inc.
(NasdaqCM:ARIS)
Snap-On Inc. (NYSE: SNA)
LTM
EBITDA LTM EBIT
647.27 586.20
LTM
LTM
Diluted Tangible
EPS
BV/Share
6.10
36.66
Implied Price_Mean
$ 136.79 $ 247.16
$ 128.41 $
682.67
Implied Price_Median
$ 116.96 $ 133.67
$ 128.00 $
267.64
Implied SNA Stock Price
$ 139.52
NTM
NTM Revenue / Share EBITDA
$56.28 748.15
$
90.78
$ 126.23
$
90.62
$ 123.28
NTM EPS
7.30
$
135.36
$
116.45
STRENGTHS
Strong recent financial performance due restructuring
Stable supply of short-term raw materials
Continuous quarterly dividend for past 74 years
Promising growth prospects
Diverse and loyal customer base
CONCERNS
Changes in economic policies
Uncertainty in U.S military spending
Declining European economy
Stock Price as of 11/5/14
: $134.35
Stock Price according to DCF
: $131.30
Stock Price according to Comparable Analysis: $139.52
Recommendation :
HOLD
Q&A

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