Legacy Tools Will Suffer As EV Trends Disrupt Markets

Key Takeaways

• Electric vehicle adoption and digital automation are expected to steadily reduce demand and margins for Snap-on's core tool and diagnostic categories over time.
  
• Competitive pressure from e-commerce and industry consolidation undermines Snap-on's pricing power and profitability, while limited innovation accelerates brand and earnings erosion.
  
• Strong innovation, resilient demand, and strategic manufacturing position Snap-on for continued margin growth and shareholder returns amid stable financial performance.

Catalysts

Manufactures and markets tools, equipment, diagnostics, and repair information and systems solutions for professional users worldwide.

• The accelerating shift to electric vehicles, which require fewer and fundamentally different maintenance tools compared to traditional internal combustion vehicles, is expected to steadily reduce demand for Snap-on's core product categories, leading to long-term declines in revenue from both tools and diagnostic equipment.
  
• Increasing digitization and automation within maintenance and repair environments threaten to erode demand for Snap-on's high-margin manual tools, as robotic platforms and software-based diagnostics gain greater market share and further compress net margins over time.
  
• The company's unique franchise dealer network is facing existential pressure from the proliferation of e-commerce giants and direct-to-consumer models, which are able to offer similar products at lower prices, diminishing Snap-on's pricing power, damaging brand loyalty, and lowering predictable earnings and free cash flow in future years.
  
• Snap-on's ability to innovate in digital tools and advanced diagnostics remains limited compared to faster-moving technology-focused entrants, setting the stage for increasing R&D costs, higher competitive pricing pressure, and ongoing net margin contraction as legacy products become less relevant.
  
• Industry-wide consolidation among automotive service chains and OEMs is likely to grant these end customers greater bargaining power, leading to stronger margin compression and increased earnings volatility, while regulatory and globalization trends further inflate compliance and cost structures, eroding long-term profitability.

Snap-on Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Snap-on compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Snap-on's revenue will decrease by 0.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 19.7% today to 20.8% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $22.01) by about July 2028, up from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, down from 16.8x today. This future PE is lower than the current PE for the US Machinery industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Snap-on Future Earnings Per Share Growth

Risks

• Snap-on's RS&I Group is experiencing consistent growth, with operating margin rising for 12 of the last 13 quarters and strong demand for diagnostics and repair information products, which supports higher-margin recurring revenue and could drive long-term increases in net earnings.
  
• Sales in the automotive repair markets remained resilient, bolstered by a growing average vehicle age, rising miles driven, increased household spending on repairs and higher technician wages, which all suggest ongoing stable or rising demand that may support steady or increased revenue.
  
• The company reported strong acceptance of innovative new products, such as its TRITON wireless diagnostics platform and advanced hand tools, which have already achieved high sales targets; continued innovation and rapid product adoption could protect or expand market share, positively impacting revenue and margins.
  
• Management noted that Snap-on's decentralized manufacturing, with a significant portion of production in the markets where they are sold, helps mitigate tariff risk, which could help stabilize gross margins and earnings even amid trade policy volatility.
  
• Snap-on's financial position remains robust, with high gross operating margins, strong free cash flow, a net cash balance sheet and significant capacity for share buybacks or future acquisitions, all of which could improve shareholder returns and support long-term net earnings growth.

Valuation

• The assumed bearish price target for Snap-on is $236.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Snap-on's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $400.0, and the most bearish reporting a price target of just $236.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 7.6%.
• Given the current share price of $322.27, the bearish analyst price target of $236.0 is 36.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.