Motley Fool Income Investor recommendation Snap-on (NYSE:SNA) will soon be known as a growth company if it's not careful. Fortunately, the toolmaker's dividend yield is still decent, and operational improvements are easily offsetting the lower yield as the stock price goes up. But does the company still have the huge potential that made it a pick in the first place?
Judging by earnings released Tuesday morning, Snap-on shows no signs of running out of steam. First-quarter earnings grew more than 76% and sales advanced nearly 20% as management cuts costs, improves margins, and integrates last fall's acquisition of ProQuest's (NYSE:PQE) business-solutions segment to add more software and systems capabilities to the existing tool, diagnostic, and equipment solutions businesses.
Quarterly sales continued to grow across product platforms and regions, with notable strength in the tools segment in the United States and international franchises in the U.K. and Australia. For the rest of the year, management reckons it will see "continued operating and earnings improvement," but didn't provide more specifics in the earnings release.
Analysts on average expect full-year earnings of $2.61, but that could be ramped up due to the strong first quarter, which has also caused a 15% jump in the stock price. That means the forward P/E has become rather rich at close to 22. I recently pointed out that Snap-on is a solid cash generator, but with the recent run, one has to wonder how much good news is now priced into the shares.
Snap-on is also more richly valued than competing tool and accessory firms such as Black & Decker (NYSE:BDK), Danaher (NYSE:DHR), or Stanley Works (NYSE:SWK). A true competitor is hard to identify because tool equipment and related industrial uses vary widely, but at current levels, Snap-on will need to post many more years of the growth it's experiencing now. In other words, the downside risk of not meeting growth expectations is increasing as the stock price moves higher.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
