Snap-on (SNA +0.79%) is a company that has prided itself on making work easier since it was incorporated in 1920. The company manufactures and markets tools, equipment, and other products and services that are aimed at professional who perform critical tasks. A large customer base of Snap-on is car dealerships or auto repair centers, but also has products aligned with manufacturing, military, and aviation. The company has developed innovative strategies that aim to grow the company's top and bottom lines. These strategies have been rewarded recently, with the stock price shooting up 36% through the last year.
The chart above shows two competitors of Snap-on. Stanley Black & Decker (SWK 0.82%) is a direct competitor that produces many products that sell alongside Snap-on tools. Danaher (DHR +0.01%), specifically its test and measurement segment, owns the Matco brand of tools, which produces comparable products to Snap-on. The test and measurement segment generates about 20% of the company's revenue on a yearly basis. On the basis of stock price, Snap-on has nearly doubled the growth of Stanley Black & Decker and under-performed Danaher by 7% within the last year.
SNA Operating Margin (TTM) data by YCharts
Snap-on has created and driven a company-wide initiative to drive costs lower in order to expand margins. This has been a strategy the company has worked on since the early 2000's. The company experienced consistent widening of margins until the recession, but since then has grown operating margin from 10% in 2009 to 17.6% in 2012. In this same time Stanley Black & Decker's margins have decreased about 4% and Danaher has experienced only small growth.
Snap-on outperforming Danaher is impressive, but due to the differences in the two businesses the companies need to be compared apples to apples. The test & measurement segment of Danaher had a margin of 20% in 2012. This is better than Snap-on, but the segment has experienced zero growth in margin the last few years compared to Snap-on's 5% growth. Danaher's segment margins may be higher, but it is the consistent growth of Snap-on that will continue to increase investment returns in the long-term.
Stanley Black & Decker is a direct competitor in many of Snap-on's markets. In 2009, the company had an operating margin of 9.20% compared to Snap-on's 10.38%. Since then Snap-on has seen a growth around 7%, while Stanley Black & Decker's operating margin has decreased nearly 2.5%.
In 2010, Stanley Works and Black & Decker merged, which was followed by a decrease in operating margins. However, the argument cannot be made that Snap-on's margins are higher due to the change in business dynamics at Stanley Black & Decker. The company's operating margin in 2011 was 8.87%, which means that it decreased almost 2% by 2012 when the company produced a 6.94% margin. The margins may have been affected after the merger, but the recent decrease highlights Snap-on's margins are going the opposite way of its competitors.
Snap-on's expansion of margins
In the third quarter of 2013 Snap-on's margin was at 14.8%, up 1.3% from last year. The operating margin was up 1.2% in the first and second quarter, which points to a full year growth in margin above 1%. This is a great sign that Snap-On's methods to decrease costs are working, even while it invests in expanding its business into new markets.
One specific way Snap-On can offset additional investments in its runways for growth is improving margins in mature segments. In the Commercial & Industrial segment and SNA Europe, which is its European hand tools business, the company experienced a decrease in revenue, but an increase in operating margin. These are driven by Snap-On developing value creation goals within each segment. These range from realizing and implementing efficiencies, implementing reductions in workforces, and achieving improvements along the company's supply chain.
Expanding competitive advantage
Snap-on is now focusing on its "Runways for Growth" as key initiatives to expand the company's top and bottom lines in the future. These strategies are growing its franchise network, expanding the products with the garage portion of the company, extending the company's offerings and participation in critical industries, and increasing its reach in emerging markets. The two runways below show a clear sign of future growth. If Snap-on can continue to drive these initiatives it will create a solid return for investors.
The rise of the franchise
The main goal of expanding the franchise network is to reach more technicians, who are the end user of the products. The franchises are made up of mobile sales units within the Snap-on tools segment. Some of the company's initiatives have been creating specially equipped trucks display a large range of tools and accessories compared to the normal franchisee van, which allows for more hands-on testing and analysis. In response to these strategies, franchise revenue growth was 8.1% compared to last year.
Growth in emerging markets
Snap-on is focusing on its strategy to build in emerging markets by expanding into new countries. The company has created a large physical presence in Asia where it manufactures and sells tools and products within the countries it occupies. In 2012, Snap-on opened its fourth manufacturing facility in Kunshan, China to produce under-car equipment.
The strategy of this expansion is to capture benefits from the fast growing repair industries in emerging markets. In the recent earnings call it was stated these markets have experienced a low double-digit growth in the last year with China, Korea, and Thailand performing well this past quarter. The growth has been seen in hand tools and under-car equipment, which is confirmation the new facility in China was a sound investment.
Bottom Line
Snap-on has developed clear and defined methods to continuously increase revenues while improving operating efficiency. The focus on value creation and detailed runways for growth allow investors to fully comprehend the company's future strategy. This company has a solid dividend that has not been stopped since it began in 1939, and it's a mature company that is not afraid to find new and innovative ways to ignite future growth. These are some of the main reasons I believe any Fool should get in now and experience the long term benefits.
