Over the past six months, Snap-on has been a great trade, beating the S&P 500 by 13%. Its stock price has climbed to $384.61, representing a healthy 19% increase. This performance may have investors wondering how to approach the situation.
Is now the time to buy Snap-on, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Snap-on Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Snap-on. Here are three reasons why SNA doesn't excite us and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
Investors interested in Professional Tools and Equipment companies should track organic revenue in addition to reported revenue. This metric gives visibility into Snap-on’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Snap-on’s organic revenue averaged 2% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Snap-on might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Growth Has Stalled Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Snap-on’s EPS was flat over the last two years, just like its revenue. This performance was underwhelming across the board.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Snap-on’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Snap-on isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 19.3× forward P/E (or $384.61 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Snap-on
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