SNAP-ON
RCMP
Richie HartzInvestment Presentation
Ha Da Jang
Diana Yang
Diana Yang
Iris Zhang
Ishan Prasad
Hexiyou Xu
April 16, 2013 1
AGENDA
Introduction
Company Overview
Industry Overview
Stock Performance
Financial Analysis
Valuation
Recommendation
2
INTRODUCTION COMPANY INDUSTRY VALUATION
COMPANY PROFILE
• Manufacturer and marketer of tools, equipment, and
diagnostics
• Provides repair information and systems solutions
• Four business segments: Commercial and Industrial, Snap-On
Tools, Repair Systems & Information, and Financial Services
• Headquarters: Kenosha, Wisconsin
• Employs over 11,200 people worldwide
• Services professional in over 130 countries
• Has continuously paid dividends since 1939 without
interruption or reduction
• Market Cap: $4.95 Billion
Source: Snap-On Inc. 2012 10-K 3
INTRODUCTION COMPANY INDUSTRY VALUATION
COMPANY HISTORY
1956:
Acquired Joseph P
1920: Weidenhoff Company,
Snap-On Wrench manufacturer of
Company founded by timing and analysis 2005:
William Seidemann equipment Entered India
and Joseph Johnson
1920 1931 1950s 1956 1978 2005
1931: 1950s: 1978:
Entered Expanded concept of Listed on NYSE
international walk-in vans and
arena pioneered franchisee
van channel
Source: Snap-On Inc. official website 4
INTRODUCTION COMPANY INDUSTRY VALUATION
SALES BREAKDOWN
• Opportunity to grow globally as majority of sales is domestic
• Ability to leverage technology and products across customers and regions
• Economies of scale – optimize cost structure
Breakdown of 2012 Net Sales Before Financial Services of $2.94 bn
Geographic Business Segment Product
Source: Snap-On Inc. 2012 10-K 5
INTRODUCTION COMPANY INDUSTRY VALUATION
MORE ABOUT SNAP-ON
Brands End Markets
• Snap-On • Vehicle dealerships
• ATI • Repair centers
• Blue-Point • Aviation
• BAHCO • Aerospace
• Irimo • Agriculture
• Fish and Hook • Construction
• Sun and ShopKey Brands • Government and military
• Cartec • Mining
• John Bean • Natural resources & power generation
Distribution Channels
•Mobile Van Channel
•Company Direct Sales
•Distributors
•E-Commerce
Source: Snap-On Inc. 2012 10-K 6
INTRODUCTION COMPANY INDUSTRY VALUATION
PRODUCT SEGMENTS
FY2012 Revenues by Product Segment
Equipment: Diagnostics & Repair Info: Tools:
Air compressors/Air Fuel and engine systems Hand tools (Aviation,
processing equipment (Compression gauge sets, brake, measuring,
Battery charging and fuel system) headlamp, hammers,
testing Hand held diagnostics (Gas sockets)
Cooling system analyzers, scan tool Power tools (Power tool
Engine service accessories) accessories, flashlights)
Exhaust Testing and electronics Tool storage (Floor mats,
Tire and wheel (Circuit testers, computer, metal boxes, work
Paint spray electrical) surface, roll carts)
Source: Snap-On Inc. official website 7
INTRODUCTION COMPANY INDUSTRY VALUATION
HISTORICAL FINANCIALS
Revenues Operating Earnings
Capital Expenditures Operations before FinCo - Operating Margins (%)
Source: Company 2012 10-K 8
INTRODUCTION COMPANY INDUSTRY VALUATION
KEY FINANCIAL RATIOS
2010A 2011A 2012A
Profitablility Ratios
Dividend Yield 2.2% 2.5% 1.8%
Return on Equity (ROE) 13.3% 17.9% 16.8%
Return on Asset (ROA) 6.2% 9.5% 10.2%
Profit Margin 12.1% 13.5% 13.9%
Liquidity Ratios
Current Ratio 1.91 2.20 2.37
Quick Ratio 1.46 1.50 1.63
Leverage Ratios
Debt to Equity 30% 17% 8%
Interest Coverage 5.83 6.40 7.59
Operating Efficiency Ratios
Receivables Turnover 6.03 6.16 5.91
Inventory Turnover 4.27 3.92 3.83
Payables Turnover 11.77 10.77
Receivable Conversion Period 58 61
Inventory Conversion Period 92 94
Payment Deferral Period 31 33
Cash Conversion Cycle 120 122
Source: 2012 10-K 9
INTRODUCTION COMPANY INDUSTRY VALUATION
Company Profile — Competitive Strengths
Strengths Weaknesses
Diversified portfolio catering to large customer base Revenues dependent on franchisees
Strong and effective distribution network Heavily dependent on credit risk of customers
Attractive dividend yield Significant dependence on European market
Strong and constant innovation
Stable supply of short-term raw materials
Opportunities Threats
Rising demand for power and hand tools in the US Intense competition
Growing global automotive aftermarket Exposure to commodity price fluctuations
Repair industries develop in emerging markets Financial regulatory changes
Increased costs due to new compliance and
Expand services adjacent to existing markets
environmental regulations
Extend to critical industries outside of vehicle repair
Source: Snap-On 2012 10-K, Company Annual Report, DataMonitor Snap-On Report 10
INTRODUCTION COMPANY INDUSTRY VALUATION
INDUSTRY OVERVIEW
• Sector: Industrial Goods
• Industry: Small Tools and Accessories
• Most tools are for automobile
• Growth from 4 sources:
– Franchise network
– Expand in garage
– Extend to critical industries
– Build in emerging markets
Source: Snap-On 2012 10-K, Company Annual Report, DataMonitor Snap-On Report 11
INTRODUCTION COMPANY INDUSTRY VALUATION
Porter’s Five Forces
Small Tools & Accessories
Threat of New Entrants: Low
Lack of Industry experience/ know-how
Threat of Substitute Products: Low
Matured industry with large competitors
Bargaining Power of Buyers: Moderate to High
Pricing Pressures due to intense competition and high
consumer expectations
Bargaining Power of Sellers: Moderate
High concentration of sellers, however subject to market prices
Intensity of Competition: High
Large, established players dominating market
Source: Snap-On 2012 10-K, Company Annual Report, DataMonitor Snap-On Report 12
INTRODUCTION COMPANY INDUSTRY VALUATION
GLOBAL OUTLOOK
Expected Global Trends Future Growth Drivers
• Robust consumer demand is expected to • Increased in new mobile lead to increase in
support increased production in North more tools usage
America at a moderate pace • The number of current mobile in use is
• Macro economic uncertainties affecting large enough to support sale
production in Europe • Increase in purchasing power lead to using
• Continued high expected growth in more professional tools
emerging markets
Source: DataMonitor Snap-On Report, Company 2012 10-K 13
INTRODUCTION COMPANY INDUSTRY VALUATION
EXPOSURE TO STEEL PRICE FLUCTUATION
Steel is the principal raw material
(USD/MT) LME 3-Mo. Steel
$800
$700
$600
$500
$400
$300
$200
$100
$0
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12
Source: Bloomberg 14
INTRODUCTION COMPANY INDUSTRY VALUATION
EXPOSURE TO CONSUMER CREDIT RISK
Slowdown in global economy can adversely affect the revenue collection
15
INTRODUCTION COMPANY INDUSTRY VALUATION
OTHER MACROECONOMIC INDICATORS
Annualized US Auto Sales / Parts & Tire Sales US Unemplyment & Disposable Personal Income (Billion)
20 7.5
US Auto Sales (LHS) Parts & Tire Store Sales (RHS) 11% $13,000
Disposable Income (RHS) Unemployment (LHS)
17.5 10% $12,500
7
15 9%
$12,000
8%
12.5 6.5 $11,500
7%
10 $11,000
6 6%
7.5 $10,500
5%
5 5.5 4% $10,000
Source: Bloomberg 16
INTRODUCTION COMPANY INDUSTRY VALUATION
STOCK PERFORMANCE
Source: Yahoo! Finance 17
INTRODUCTION COMPANY INDUSTRY VALUATION
SNAP-ON TOTAL SHAREHOLDER RETURN (1)
Notes:
1Assumes $100 was invested on Dec. 31, 2007, and that dividends were reinvested quarterly
2Company’s fiscal year ends on the Saturday that is on or nearest to December 31 of each year, for eas of calculation, the fiscal year end is assymed to be December 31.
3Peer Group consists of: Stanley Black & Decker, Inc. Danaher, Emerson Electric Co., Genuine PartsCompany, Newell Rubbermaid, Pentair Ltd., SPX Corporation and W.W. Grainger
Source: Company 2012 Annual Report 18
INTRODUCTION COMPANY INDUSTRY VALUATION
COMPARABLE STOCK PERFORMANCES
• GPC: Genuine Parts Company
• DHR: Danaher
• SWK: Stanley Black & Decker
• SPW: SPX Corporation
• GWW: W.W. Grainger
Source: Yahoo! Finance
19
INTRODUCTION COMPANY INDUSTRY VALUATION
Valuation — Trading Comparables
Enterprise Value / Price / NTM Enterprise Value
Forw ard Total Forw ard NTM Forw ard
Com pany Nam e EBITDA EBIT EPS Tangible BV Revenue EBITDA P/E
Snap-On Inc. (SNA) 9.7x 11.1x 16.4x 2.7x 1.81x 9.0x 15.00x
Stanley Black & Decker, Inc. (SWK) 9.6x 13.1x 15.0x 1.9x 1.37x 8.7x 14.40x
Genuine Parts Company (GPC) 10.8x 11.9x 18.6x 4.0x 0.83x 9.3x 17.30x
LKQ Corp (LKQ) 14.9x 17.3x 25.0x 3.3x 1.62x 12.6x 20.50x
Danaher Corporation (DHR) 10.8x 13.3x 18.0x NM 2.19x 10.0x 17.81x
Emerson Electric Co. (EMR) 8.4x 10.3x 16.0x NM 1.57x 7.7x 19.19x
New ell Rubbermaid Inc. (NWL) 8.3x 10.2x 38.8x NM 1.25x 8.1x 18.46x
Pentair Ltd. (PNR) 12.2x 15.5x NM NM 1.41x 9.2x NM
SPX Corporation (SPW) 10.1x 13.0x 21.0x NM 0.94x 9.6x 13.92x
W.W. Grainger, Inc. (GWW) 11.6x 13.0x 21.4x 6.4x 1.55x 9.8x 23.71x
High 14.9x 17.3x 38.8x 6.4x 2.2x 12.6x 23.7x
Low 8.3x 10.2x 15.0x 1.9x 0.8x 7.7x 13.9x
Mean 10.7x 13.1x 21.7x 3.9x 1.4x 9.5x 18.2x
Median 10.8x 13.0x 19.8x 3.7x 1.4x 9.3x 18.1x
LTM Diluted LTM Tangible NTM Revenue /
LTM EBITDA LTM EBIT EPS BV/Share Share NTM EBITDA NTM EPS
Snap-On Inc. (NYSE: SNA) 593.1 516.4 5.25 34.05 57.84 618.5 5.27
Implied Price_Mean $109.38 $115.76 $114.23 $132.89 $81.81 $100.33 $95.75
Implied Price_Median $109.52 $115.38 $104.11 $124.80 $81.55 $98.71 $95.62
Source: Capital IQ
20
INTRODUCTION COMPANY INDUSTRY VALUATION
MAKING THE NUMBERS WORK
Valuation shows that Snap-On is currently trading at a discount to its peers and to its intrinsic value
Current
$81.23
• 52-week high: $56.88
52-Week Range $56.88 $85.50 • 52-week low: $85.50
• 2.5%-3.5%Perpetuity
growth rate
$81.67 $117.59
DCF • 8.57% - 10.57% WACC
• 15.0x – 21.7x LTM EPS of
5.25
Trading $79.01 $114.23
Price/LTM EPS
$50 $75 $100 $125
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INTRODUCTION COMPANY INDUSTRY VALUATION
Valuation — WACC Analysis
WACC Calculation
Capital Structure
Total Market Value of Equity 4,769
Total Debt 976
Total Capitalization 5,745
Debt-to-Total Capitalization 16.98%
Equity-to-Total Capitalization 83.02%
Beta 1.36
Risk-Free Rate 1.78%
Market Risk Premium 7.00%
Cost of Equity (CAPM) 11.30%
Cost of Debt 1.60%
Tax Rate 32%
After-tax Cost of Debt 1.09%
WACC 9.57%
Source: Bloomberg 22
INTRODUCTION COMPANY INDUSTRY VALUATION
VALUATION — SNAP-ON SANS FINANCIAL SERVICES
Fiscal Year Ended on December 29,
($ in millions) 2013E 2014E 2015E 2016E 2017E
Revenues 3,161 3,365 3,543 3,690 3,800
COGS (1,681) (1,790) (1,884) (1,963) (2,021)
Gross Profit 1,480 1,575 1,658 1,727 1,779
EBIT 416 443 467 486 500
Less: Income Taxes @ 32% (124) (132) (139) (145) (149)
EBIAT 292 311 327 341 351
Add: Depreciation & Amortization 72 76 80 84 86
Less: Capital Expenditures (72) (76) (80) (84) (86)
Less: Increase In NWC 52 (30) (22) (14) (5)
Unlevered Free Cash Flow 344 281 305 327 347
Terminal Growth Rate 3.00%
Terminal Value 5,437
Discount Rate 9.57%
Implied Enterprise Value 4,671
SNA Fair Value (before Financial Services) Sensitivity Analysis Enterprise Value 4,678
Terminal Growth Rate Less: Debt (143)
81.45 2.0% 2.5% 3.0% 3.5% 4.0% Add: Cash 211
7.57% $81.45 $81.45 $81.45 $81.45 $81.45 Implied Equity Value 4,746
8.57% $81.45 $81.45 $81.45 $81.45 $81.45
WACC
9.57% $81.45 $81.45 $81.45 $81.45 $81.45 Shares Outstanding 58.271
Fair Value before Financial Services $81.45
10.57% $81.45 $81.45 $81.45 $81.45 $81.45
11.57% $81.45 $81.45 $81.45 $81.45 $81.45 Current Stock Price $81.23
23
INTRODUCTION COMPANY INDUSTRY VALUATION
VALUATION — FINANCIAL SERVICES
Fiscal Year Ended on December 29,
($ in millions) 2013E 2014E 2015E 2016E 2017E
Net Income 47 58 68 77 81
% Margin 22.2% 22.3% 22.4% 22.4% 22.4%
Less: Change in BV of Equity (47) (58) (68) (77) (81)
Other comprehensive Income - - - - -
Free Cash Flow 93 115 137 153 163
Terminal Growth Rate 3.00%
Terminal Value 2,019
Discount Rate (Cost of Equity) 11.30%
Enterprise Value 1,653
Financial Services Fair Value Sensitivity
Terminal Growth Rate
Enterprise Value 1,653
$14.24 2.0% 2.5% 3.0% 3.5% 4.0%
Less: Debt (827)
9.30% $19.42 $21.39 $23.68 $26.36 $29.54
Add: Cash 3
10.30% $15.19 $16.65 $18.31 $20.21 $22.41
Implied Equity Value 830
WACC
11.30% $11.88 $12.99 $14.24 $15.64 $17.24
12.30% $9.21 $10.08 $11.04 $12.12 $13.32 Shares Outstanding 58.271
13.30% $7.02 $7.71 $8.48 $9.32 $10.25 Fair Value (FinCO) $14.24
Total Fair Value Sensitivity
Terminal Growth Rate
$95.69 2.0% 2.5% 3.0% 3.5% 4.0% Fair Value (FinCO) $14.24
7.57% $95.69 $95.69 $95.69 $95.69 $95.69 Fair Value before Financial Services $81.45
8.57% $95.69 $95.69 $95.69 $95.69 $95.69 Total Fair Value $95.69
WACC
9.57% $95.69 $95.69 $95.69 $95.69 $95.69
Current Stock Price $81.23
10.57% $95.69 $95.69 $95.69 $95.69 $95.69
% Discount 18%
11.57% $95.69 $95.69 $95.69 $95.69 $95.69 24
INTRODUCTION COMPANY INDUSTRY VALUATION
RISKS & DECISION DRIVERS
Risks
(1) Earnings release in 2 days
(2) Competitive Market Segment
(3) Macroeconomic Landscape
Decision Drivers
(1) GICS Diversification
(2) Stronger growth compared to peers
(3) DCF Valuation
INTRODUCTION COMPANY INDUSTRY VALUATION
RECOMMENDATION
Buy 100 shares @ Market Price
Illustrative purposes:
100 * $81.23 = $8,123
INTRODUCTION COMPANY INDUSTRY VALUATION
Snap-On Incorporated
Questions?
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