Shares of Motley Fool Income Investor pick Snap-on (NYSE:SNA) are up more than 40% from their 52-week lows and now also trade for more than 30 times trailing earnings. But as scary as that sounds, the overall valuation is more reasonable than it appears, and this tool and equipment maker and distributor has long-term appeal.
First, a brief recap of 2006 results released yesterday. Our recent Fool by Numbers will drive you through the quarterly details that were strong and came in ahead of analyst expectations. Full-year sales advanced 7.1% and included some benefit from the November acquisition of ProQuest's (NYSE:PQE) business-solutions segment to add more software and systems capabilities. Earnings for the year grew only 6.3% to $1.69 but would have been $0.40 higher had it not been for a franchisee litigation settlement.
Based on the adjusted number, Snap-on is trading at 24 times trailing earnings, and based off 2007 analyst expectations of $2.36, it's trading at about 22 times. It gets even better; I estimate that free cash flow for 2006 was just less than $2.80 per share. That's a price-to-free cash flow ratio of just over 18 times, and it should be even lower for 2007.
I still wouldn't characterize Snap-on as a steal at current prices, but the ProQuest deal should help further accelerate top-line growth. Meanwhile, cost-cutting initiatives and a focus on enhancing services provided to customers and franchisees have brought the company a long way from the early 2000s, when overly rapid franchise expansion and manufacturing miscues greatly diminished a brand that has existed since 1920.
Even with the recent stock run, the 2.3% dividend yield is decent and above the market average. I also like Snap-on's exposure to the professional automotive-service segment, which should grow faster than the do-it-yourself side of the business as vehicles become increasingly complicated and dependent on technology. That bodes well for Snap-on, since approximately 70% of its business is automotive-related. Peers including the divisions of Stanley Works (NYSE:SWK) and Danaher (NYSE:DHR) could also benefit, but Snap-on is one of the only pure-play ways to gain exposure. Now may not be the most opportune time to pick up some shares, but definitely keep this on your watch list.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.
