Snap-On (SNA)

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Snap-On Incorporated (SNA) is a leading manufacturer and marketer of tools, diagnostic and equipment solutions for professionals. Product lines include hand and power tools, tool storage, diagnostics software, information management systems and shop equipment. Snap-On’s clients mainly consist of professionals in the automobile industry, government, agriculture and construction. Superior technology, customer service and product quality set Snap-On apart from other professional tool manufacturers. Sales are made directly to professionals at their business by sales vans owned by independent franchisees that sell and service Snap-On products on-site to professionals in over 125 countries.

Because Snap-On’s high end products cater to professionals, Snap-On is a company with a high-end market compared to similar companies. Snap-On’s success is largely influenced by the performances of the construction and automobile industries across the globe. Snap-On Incorporated consists of 4 business segments: Snap-On Tools Group, Commercial and Industrial Group, Diagnostics and Information Group, and Financial Services.

[edit] Business Overview

Snap-On Tools Group (Brands include Snap-On, Blue-Point, and Lindstrom) Consists of operations serving the worldwide franchise van distribution channel. These independent franchisees own vans stocked with tools, making weekly visits to customers. Sales are made on-site and any necessary service performed on products to ensure superior customer satisfaction.

Commercial and Industrial Group (Brands include Blackhawk, Hofmann, and John Bean) Consists of operations serving industrial clients with product sales and services through non-franchise distribution channels.

Diagnostics and Information Group (Brands include Snap-On, Nexiq, and Sun) Consists of operations providing diagnostic equipment, vehicle service information, business solutions and electronic parts catalogs to customers. This segment includes the business services operations from ProQuest Business Solutions, acquired in November 2006.

Financial Services Consists of operations related to lending to franchisees and customers to facilitate product and service sales. This segment is known as Snap-On Credit LLC and is 50% owned by Snap-On Incorporated.^[1].

[edit] Business Financials

Snap-On’s revenues come from product sales to its franchises and professional customers, franchise fees, business services to manufacturers and automobile dealers, and various sales financing activities.

In 2006 Snap-On Incorporated recorded net earnings of $100.1 million, up from $92.9 million in 2005^[2]. Operating Profits in 2006 were $164.9 million and in the third quarter of 2007 were $72.4 million. In 2006 net earnings per share were $1.69. Net sales rose 7.1% to $2.5 billion in 2006. 46% of revenues in 2006 were generated by the Snap-On Tools Group. It should be noted on the following graph, however, that growth in revenues has not resulted in corresponding growth in operating income.

Having never missed a quarterly dividend since 1939, quarterly dividends rose to $0.27 per share in 2006 These growing earnings together resulted in a total annual shareholder return of 29.7% in 2006^[3].

[edit] Trends and Forces

[edit] Environmental Policy

With over 70% of Snap-On’s sales generated from sales to the automobile industry, a heavy reliance on gas-powered automobiles could be a source of concern if global trends shift away from personal automobile usage. If personal vehicle usage declines, the demand for automobile repairs will decline and the need for high-end tools will decline accordingly. With environmental issues moving ever closer to the forefront of global politics, Snap-On may be heavily exposed to risk from changes in automobile usage patterns. Conversely, increased regulation of automobile standards may increase the demand for automobile repairs and tune-ups, resulting in increased demand for tools and a possible growth opportunity for Snap-On.

[edit] Gas Prices

As Snap-On’s sales rely heavily on the auto industry (70% in 2006), Snap-On Incorporated shares the market risk of that industry to changes in Oil Prices . After the price of crude oil surpassed $100 per barrel in November 2007, the price of gasoline became an increasing concern for the automobile industry. If gas prices continue to rise, many consumers may be forced to cut back on car usage and in doing so reduce the need for automotive repairs and the tools used for those repairs. Consequently, Snap-On is exposed heavily to market risks stemming from changes in gas prices and consumption.

[edit] Reliance on franchisees for sales success

With 41% of sales in 2006 coming from the Snap-On Tools Group, Snap-On Incorporated relies heavily on the success of its independent franchisees. This reliance has, however, proven to be a profitable one. Much of the brand recognition and reputation that Snap-On has is tied to the customer-focused van distribution channel and the personal relationships between customers and franchisees. However, such a heavy reliance on sales performance by independent franchise owners could prove to largely impact Snap-On’s success. A recent trend in annual franchise losses could force many franchises to shut down, which could significantly cut Snap-On's sales.^[4].

[edit] Restructuring risk

In the last few years, Snap-On has vastly restructured the production and distribution operations. An overabundance of franchises led to many franchisees incurring yearly losses. The restructuring could continue to pose a problem for Snap-On. Also, the purchase in November 2006 of ProQuest Business Solutions poses risks of business integration^[5]. However, sales from the $516 million acquisition were $48.7 million in the third-quarter of 2007^[6], seemingly indicating that the integration has been successful thus far.

[edit] Moving/Pricing into new Customer Segments

Snap-On feels that a large risk factor for their growth is an increase in price competition in the tool manufacturing business. As technology and production improve, Snap-On must continue to stay ahead of their competitors in quality and service. An increase in competition and a decrease in production costs may cause the high-end market segment to move away from Snap-On tools and switch to cheaper comparable tools. Snap-On is combating this risk with their newly redefined Blue-Point brand of mid-range tools that should appeal to a wider customer base^[7].

[edit] Competition

Mobile Van Distribution Channel: These companies use the mobile van franchise model to sell directly to customers on location. Snap-On competes directly with these companies for industrial and commercial customers.

1. Danaher (DHR)
2. Stanley Works (SWK)

Power Tool Manufacturers: These companies manufacture power tools that are used for both personal and industrial applications. Snap-On competes directly with these companies through innovation and quality to retain strong market share.

1. Ingersoll-Rand Company (IR)
2. Black & Decker (BDK)
3. Robert Bosch Tool Group, Inc.
4. Milwaukee Electric

Home Centers: These companies sell a wide range of tools and home improvement products. Home centers tend to sell to a wide commercial customer base, whereas Snap-On focuses on professionals. However, Snap-On is currently trying to compete for a similarly wide customer base with its middle-range Blue-Tip line of tools.

1. Home Depot (HD)
2. Lowe's Companies (LOW)
3. Sears Holdings (SHLD)

Auto Parts Supply Outlets: These companies sell tools and parts for automotive repair. Snap-On competes indirectly with these companies for market share within the automotive repair business, because the supply outlets are not as focused on high end parts for professionals as Snap-On.

1. AutoZone (AZO)
2. Pep Boys-Manny, Moe & Jack (PBY)
3. NAPA Auto Parts^[8].

[edit] Notes

1. ↑ SNA 2006 10-K, Products and Services, page 6. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=4120
2. ↑ SNA 2006 10-K, Consolidated Statement of Earnings, page 50. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=4120
3. ↑ SNA 2006 Annual Report, Letter to Shareholders, page 2. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=4120
4. ↑ SNA 2006 10-K, Item 1a:Risk Factors, page 7. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=4120
5. ↑ SNA 2006 10-K, Item 1a:Risk Factors, page 7. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=4120
6. ↑ SNA 3Q 2007 Earnings News Release, page 1. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=5644
7. ↑ SNA 2006 Annual Report, Letter to Shareholders, page 2. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=4120
8. ↑ SNA 2006 10-K, Competition, page 9. http://corporate.snapon.com/display/DocMgmtDisplayFile.aspx?fileid=4120