Consistent Vehicle Repair Demand Leads to Solid Performance for Snap-on

Equity Analyst

Dawit Woldemariam

Revenue segments as reported by the company.

Commercial & Industrial Group

Snap-on Tools Group

Repair Systems & Information Group

Intersegment eliminations

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An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

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Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

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Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

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Snap-on provides premium tools to vehicle repair shops and industrial customers. We believe it will continue to be the top player in the tool industry. The company benefits from a strong brand reputation among repair technicians. Customers value Snap-on’s high-quality and strong-performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. We think customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options. 

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Snap-on’s tools are considered the go-to products, exhibiting better durability and reliability than cheaper alternatives. Diagnostic products arm technicians with more information to identify issues faster. We also think increasing vehicle complexity will be a tailwind for diagnostic sales. With respect to electric vehicle adoption, we believe Snap-on will thrive as auto manufacturers are already tapping the company to develop new tools to service new EV models. We think this is a good example of how Snap-on will address the shift to EVs. We think repair work will shift away from engines to batteries, sensors, wiring, and advanced driver-assistance systems. In our view, this will lead to new tools being developed and increased sales of diagnostic equipment. 

Snap-on has exposure to end markets with attractive tailwinds. In automotive, we think demand for vehicle repair work will be strong in the near term, largely as vehicle owners take in their cars for overdue servicing, delayed by the COVID-19 pandemic. Additionally, we believe the high average age of vehicles will support demand for repair work to keep them on the road. On the commercial and industrial side, end markets are starting to pick up in activity; we think this means an increase in repair work for heavy-duty vehicles, planes, and heavy machinery.

Business Strategy & Outlook

We assign Snap-on a narrow economic moat rating, underpinned by intangible assets and switching costs. 

Snap-on’s premium tools draw strong brand loyalty from repair professionals. The company’s tools are some of the most durable in the industry. Snap-on’s strong tool performance and focus on ergonomics help customers get repairs done faster, boosting productivity. We believe repair technicians are willing to pay higher prices if it means they can consistently complete jobs with more comfortable tools that don't break, and they can take advantage of flexible payment options. In our view, switching costs are rather low for repair professionals in the automotive vertical. Most tool alternatives are capable enough to complete repair jobs, making it possible for technicians to operate a diverse set of tools. That said, we do think Snap-on benefits from switching costs in the commercial and industrial vertical. We believe Snap-on’s ability to provide premium tools and custom solutions for mission-critical industries prevents customers from switching. Snap-on’s repair systems and information business also locks customers in. Technicians value the company’s diagnostic and software products. 

We believe Snap-on’s brand reputation among customers has led to its strong competitive position. Snap-on’s premium tools have been regarded as high-quality by repair professionals for decades. Technicians purchase tools at their own expense, making it important for them to buy high-performing tools built for daily use. In comparison, cheaper alternatives are not as durable and often end up breaking a lot sooner. The durability of Snap-on’s tools reduces the risk of breaks while technicians are working to get repair jobs done. Good ergonomics is another benefit that Snap-on brings to the work bench. We believe the company’s tools are easier to use; for example, the better grip offered compared with alternatives allows technicians to work in constrained spaces. Auto technicians can find themselves working at difficult angles, so finding tools that improve their comfort level is very valuable.

We believe Snap-on benefits from pricing power thanks to its brand familiarity among repair professionals and ability to continually provide innovative products. Snap-on’s tools consistently exhibit better durability and reliability compared with alternatives, which we think makes technicians more willing to pay 2-3 times more for them. We think working with cheaper tools can cause headaches for technicians, given the higher risk of breaks and the additional money needed to replace broken tools. We believe Snap-on’s high-quality tools reduces the total cost of ownership, as technicians can complete more repair jobs before breaks occur. This results in better productivity compared with alternatives. 

We also think technicians are willing to pay higher prices for the convenience and financing that Snap-on’s franchisees provide. Rather than spending time away from work or using a day off to replace a broken tool, technicians can call a franchisee’s sales representative to deliver a replacement that the same day, helping them maintain productivity. Sales representatives use mobile vans to deliver replacement tools and to show technicians their tool inventory for purchase right off the truck at the technician’s workplace. In addition to providing convenience for repair professionals, sales representatives offer flexible financing options. Technicians can pay for tools over time as opposed to up front. We think this flexibility afforded to technicians increases their willingness to buy more-expensive tools. For sales representatives, we believe the sales pitch becomes much easier if they offer technicians periodic payment installments, rather than asking for an up-front payment. Based on our analysis, Snap-on exhibits the highest revenue per franchisee in the tools industry. We think customers will continue to pay up for its tool durability, convenience, and flexible financing options. 

We believe Snap-on benefits from intangible asset and switching cost moat sources in the commercial and industrial business. The company’s premium tools are considered some of the most durable and reliable in the market, illustrating its strong brand reputation. While we think switching costs are low for repair professionals in automotive vertical, we do believe Snap-on benefits from switching costs in the commercial and industrial vertical. Customers use the company’s tools to repair mission-critical equipment across various end markets, including aerospace and defense, agriculture, and construction. Repair professionals in these markets have a finite window to complete repairs. The faster repairs go, the faster equipment get back into service. The mission-critical nature of these end markets results in a high cost of failure if tools break during repairs. Safety risks can also arise if equipment is not properly repaired. Parts are subject to oversight by regulators. Some are required to be installed in a precise way to meet parts certification. Snap-on’s tools and products are a critical input to customers meeting certification requirements. Therefore, switching to an alternative product poses significant risk to their operations. 

We think Snap-on’s custom kits (products packaged together for a specific task) and solutions create additional stickiness for customers. Custom kits provide technicians the right batch of products needed to service equipment, removing the hassle of finding each individual product. If a given product a customer needs does not exist, Snap-on develops that product. We estimate the company has amassed the largest number of product stock-keeping units for critical industries. Snap-on has also consistently improved the performance of its products, namely the level of strength and precision of tools. Today, vehicles and machines are increasingly being manufactured with tighter tolerances (screws/bolts are wound tighter), which requires tools with more strength. Snap-on’s tools also employ greater precision, allowing technicians to apply the optimal level of torque during repairs. Technicians use Snap-on’s battery-powered tools to preset the desired level of torque and are alerted when the right amount of torque is applied. 

The company infuses technology into its products, for example, automating tool control. Snap-on’s software solutions provide customers the ability to organize and track tools at the work site. This helps repair departments prevent tools from being lost and can keep an online inventory of where tools are at any given moment. We believe Snap-on offers customers in critical industries the best tools in the market, along with high-value custom solutions; which we think locks customers in. 

The repair systems and information business benefits from intangible assets and switching costs. The segment enjoys a strong brand reputation among repair shop owners and auto dealership service centers. Snap-on’s diagnostic products (also sold to individual technicians) help customers quickly access repair data, boosting efficiency. The company also offers a suite of technology-enabled solutions, including business management software products. Customers can do everything from cataloging parts electronically to using analytics to measure the shop’s service performance. Once these software solutions become embedded in a customer’s operations, we believe switching costs are present. Switching to an alternative would slow down operations because employees would need to overcome the learning curve associated with adopting a new operations platform. 

A good example of Snap-on’s business management software is Dealer-FX, a platform tailored for repair shops and dealerships. Dealer-FX gives Snap-on good visibility into customers’ operations, especially the pain points. The company can then drive future investments to solve the problems customers face in running their business. The software platform empowers Snap-on to be proactive in creating solutions for customers, further deepening its connection to customers. Snap-on’s diagnostic products and software solutions drive strong recurring revenue. 

We do not think Snap-on’s narrow economic moat faces any substantial threats from environmental, social, and governance risks. The company has exposure to product safety issues downstream. Snap-on's tools are utilized across various industries to repair vehicles, planes, and heavy machinery. Many of these end markets are considered critical and have a high cost of failure. While the occurrence of product malfunctions is low, the risk still remains, for example, if a repair performed with a Snap-on tool results in a product’s failure. That said, we do not view these risks as material enough to include in our valuation.

Narrow

Economic Moat

Snap-on

Snap-On, Inc. engages in the manufacture and marketing of tools, equipment, diagnostics, repair information, and systems solutions for professional users performing critical tasks. Its products and services include hand and power tools, tool storage, diagnostics software, handheld and PC-based diagnostic products, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as for customers in industries such as aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation, and technical education. The firm operates through the following segments: Commercial and Industrial Group, Snap-On Tools Group, Repair Systems and Information Group, and Financial Services. The Commercial and Industrial Group segment consists of business operations that serve the aerospace, natural resources, government, power generation, transportation, and technical education markets. The Snap-On Tools Group segment includes business operations primarily serving vehicle service and repair technicians through its worldwide mobile tool distribution channel. The Repair System and Information Group segment serves professional vehicle repair customers, primarily owners and managers of independent repair shops and original equipment manufacturer dealerships through direct and distributor channels. The Financial Services segment consists of installment sales and lease contracts arising from franchisees' customers, and business loans and vehicle leases to franchisees. The company was founded by Joseph Johnson and William Seidemann in 1920 and is headquartered in Kenosha, WI.

Earnings data Q3 2023

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Snap-on Incorporated (NYSE:SNA ) Q2 2023 Earnings Conference Call July 20, 2023 10:00 AM ET Company Participants Sara Verbsky - Vice President of Investor Relations Nicholas Pinchuk - Chairman and Chief Executive Officer Aldo Pagliari - Senior Vice President, Finance and Chief Financial Officer Conference Call Participants Scott Stember - ROTH MKM Christopher Glynn - Oppenheimer David MacGregor - Longbow Research Luke Junk - Baird Gary Prestopino - Barrington Research Operator Good morning, and welcome to the Snap-on Incorporated 2023 Second Quarter Results Conference Call. All participants will be in a listen-only mode for the duration of the call.

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