An American Manufacturer Aims for Growth

For auto mechanics and other repairers, the Snap-on (NYSE: SNA  ) brand is as iconic as Coca-Cola or Apple, synonymous with tools of superior design and the very highest quality. My dad was an auto body repairman for more than 40 years, and he couldn't afford downtime from frequently worn or broken tools -- so he bought Snap-on whenever he could. But despite its peerless reputation, the company faces the same challenges of intense global competition and rapid technological change that have broken many other long-established American manufacturers. Can it avoid their fate?

Founded in 1920, Snap-on designs, makes, and sells premium quality hand and power tools, diagnostic equipment, shop equipment, tool storage units, and business software solutions. Franchisees show and sell Snap-on tools to workers at their places of business; the company also sells tools via its online store, or directly to client businesses.

But quality products aren't the company's only strength. When workers need a tool, they always need it yesterday. Snap-on franchisees' mobile sales trucks can get those tools to workers quickly and conveniently. Without franchisees' capital, supporting that truck fleet would be a huge financial strain.

In good company
In a recent independent study, Snap-on was ranked as the No. 6 global franchise. Check out the other top-rated franchises below.   

Rank

Franchise

Country

Industry

1 Subway U.S. Sandwich and bagel franchises
2 McDonald's (NYSE: MCD  ) U.S. Fast-food franchises
3 KFC* U.S. Chicken franchises
4 7-Eleven U.S. Convenience store franchises
5 Burger King U.S. Fast-food franchises
6 Snap-on Tools U.S. Automotive repair franchises
7 Pizza Hut* U.S. Pizza franchises
Source: www.franchisedirect.com. *KFC and Pizza Hut are divisions of Yum! Brands (NYSE: YUM  ) .

It's important to note that the others on the list require franchisee capital to flourish in industries with stiff competition, while Snap-on is employing it to offer its customers the highest possible level of convenience and support. 

None of Snap-on's direct competitors replicate its full range of products or its reputation for quality. Mac Tools is a division of Stanley Black & Decker (NYSE: SWK  ) , while Matco Tools is part of Danaher (NYSE: DHR  ) -- both larger companies with numerous other subsidiaries. That makes Snap-on both the top brand in the premium tool space and the purest way to invest in this segment if you believe in its possibilities for global growth.

What's old is new again
Snap-on has a long history of stable profitability. The company enjoys high gross margins and has paid a dividend (with no reductions) every single quarter since it went public in 1939. It may look like a mature, slow-growth business because of the dominant position it holds in the U.S. automotive tools market. However, Snap-on is now a global enterprise, with 35% of 2010 revenues coming from outside North America. The company has a presence in 130 countries and numerous non-U.S. manufacturing facilities.

While a majority of foreign sales currently come from Europe, Snap-on's presence in Asia offers tremendous opportunity for growth as that region continues its rapid economic expansion. Snap-on tools are not only high quality, but also a symbol of success. Both factors should enhance demand as increased wealth comes to emerging markets. Rather than attempting to impose the U.S. model on external environments, management is adapting the tool lineup and marketing strategy to fit the unique demand profiles and product gaps found in various foreign markets.  

More than emerging markets
Snap-on is also enhancing growth by targeting key industries beyond automotive repair, including aerospace, railroads, and utilities. Snap-on has moved beyond hand and power tools. As vehicles become more and more complex and computer-dependent, diagnostic equipment and software are now a significant part of the business and a major driver of growth due to the high margins they carry. Despite the recent market pullback, and widespread concern about a deteriorating macroeconomic environment, Snap-on's sales volumes continue to increase and have now surpassed 2007-2008 prerecession levels.  

Especially in these turbulent economic times, it's important to note that management has stuck with long-standing conservative principles, rather than pursuing short-term growth. The balance sheet is solid; the dividend yield is healthy at 2.3% with a very sustainable 31% payout ratio.  Given its sound financial profile and excellent prospects for growth when the macroeconomic situation improves, I believe SNA to be an excellent value now and a great stock to hold for the long term.

Beyond the numbers, the strongest endorsement I can offer comes from my dad. He knew nothing about investing or the stock market, but he worked hard his entire life, and he trusted and believed in Snap-on tools. No matter how large their marketing budgets, Snap-on's rivals simply can't buy that kind of reputation.

If you find Snap-on's sturdy reputation and solid dividend yield inspiring, we've found 13 more high-yielding stocks that can help you build a portfolio for the long haul. Discover them all in our special free report.

Fool contributor Mike Ramsey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Yum! Brands. Motley Fool newsletter services have recommended buying shares of McDonald's and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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