This Company Has the Tools to Outperform

Articles From: New Constructs
Website: New Constructs

With deep customer relationships and innovative solutions for future equipment needs, this global supplier has a durable business ready for a changing industry. Snap-on Services Corp (SNA: $206/share) remains a Long Idea after 3Q21 earnings.

We leverage more reliable fundamental data, as proven in The Journal of Financial Economics[1], and shown to provide a new source of alpha, with qualitative research to highlight this firm whose stock present excellent risk/reward.

Snap-on Has Very Attractive Risk/Reward

We made Snap-on a Long Idea in February 2018 and the stock has underperformed the market by 39% since then. However, given the company’s strong market position and cheap valuation, we continue to see upside in the stock.

Figure 1: Long Idea Performance: From Date of Publication Through 10/26/2021

Performance: From Date of Publication Through 10/26/2021

Sources: New Constructs, LLC and company filings

What’s Working: 

Snap-on beat on both its top and bottom lines in 3Q21. Total revenue in 3Q21 rose 10% year-over-year (YoY) and is 15% above 3Q19 levels. The company’s Commercial and Industrial segment (30% of revenue in 3Q21), which expands its offerings beyond traditional auto tools and into the aerospace, power generation, and military markets, also showed signs of continued recovery from the pandemic as the segment’s revenue was up 11% YoY from 3Q20.

While other businesses with more complex supply chains may struggle to maintain inventory levels, Snap-on’s vertically integrated business enables it to better navigate the current global challenges. Snap-on’s available inventory during the supply crunch is an advantage that will help the company keep existing customers and effectively compete for new ones as other tool and equipment suppliers struggle to maintain desired inventory levels. Management spoke to the company’s advantageous supply chain position in its 3Q21 earnings call when it mentioned that its vertically integrated business, “certainly puts us in a better position to grow and probably capture new customers who might not be serviced by these people (i.e. competitors).”

Snap-on benefits from long-term demand in the automotive repair industry as it supplies auto service technicians, auto service centers, and car dealerships with tools, equipment, and diagnostic tools. For years, the average age of vehicles on the road in the U.S. has steadily increased, which creates more repair opportunities for service providers. The average age of a vehicle in 2021 of 12.1 years is up from 11.9 years in 2020.

The proliferation of driver assistance systems provides more runway for Snap-on’s diagnostic segment over the long run as demand for third-party repairs and system calibrations rise. Snap-on is already meeting this demand by offering diagnostic platforms that give repair shops the ability to make manufacturer-compliant calibrations to driver assistance systems.

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This article originally published on October 27, 2021.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.

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[1] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.

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Disclosure: New Constructs

David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.

About New Constructs
New Constructs leverages cutting-edge Robo-Analyst technology to provide insights and diligence on stocks, ETFs, mutual funds & debt issuers. Highly-respected public and private institutions believe in our concepts::

– Fundamental data and earnings: Core Earnings: New Data and Evidence

– Models for NOPAT, Invested Capital and Return on Invested Capital (ROIC): Getting ROIC Right

– Stock ratings: Robot Analysts Outwit Humans on Investment Picks

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