Expanding Beyond Automotive To Aviation And Education Drives Diversification And Revenue Growth

Key Takeaways

• Expanding into military, aviation, and education sectors suggests potential for diversified revenue streams, reducing reliance on the automotive industry.
  
• Strategic acquisitions and investments in facility expansions indicate potential for enhanced operational efficiency and market reach expansion.
  
• Snap-on faces challenges from declining sales of high-value items, operational inefficiencies, geopolitical uncertainties, regulatory costs, and intense competition.

Catalysts

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

• Expanding capabilities in key industries beyond automotive (e.g., military, aviation, education) imply potential for sales growth and diversification, possibly improving revenue streams and reducing sector-specific risks which may lead to an increase in revenues.
  
• Customized solutions demand in critical industries suggests a competitive edge and potential for higher-margin revenue from tailored offerings, likely enhancing net margins through differentiated, specialized products.
  
• Investment in facility expansions and productivity improvements signal potential for increased operational efficiency and capacity, aiming to meet demand more effectively, potentially increasing earnings through better gross margins and cost management.
  
• Continuation of strategic acquisitions could provide new growth avenues, expanding Snap-on's product range and market reach, potentially enhancing revenue growth and market share in existing and new sectors.
  
• Strong positions in educational industries and positive reception to new product launches suggest a pipeline for sustained long-term demand, potentially boosting future revenues through new innovations and cultivating the next generation of technicians.

Assumptions

• Analysts are assuming Snap-on's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.2% today to 19.8% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $21.52) by about August 2027, up from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2027 earnings, up from 14.0x today. This future PE is lower than the current PE for the US Machinery industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 0.44% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.75%, as per the Simply Wall St company report.

Risks

• The reliance on larger ticket items, such as diagnostic equipment, where sales have declined potentially impacting revenue.
  
• Operational inefficiencies due to not having enough capacity to meet product demand which could affect net margins.
  
• The geopolitical and economic uncertainty causing technician customers to delay or reduce purchases, potentially reducing revenue.
  
• Regulatory and compliance costs impacting small businesses, including garages, could potentially reduce demand for Snap-on’s products impacting revenue.
  
• Intense competition in the market that might limit Snap-on’s ability to gain market share or maintain pricing, potentially impacting earnings.

Valuation

• The analysts have a consensus price target of $287.12 for Snap-on based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $336.0, and the most bearish reporting a price target of just $233.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.3 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $273.69, the analyst's price target of $287.12 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.