Brian Sozzi Positive On Snap-On, Should You Be?

Brian Sozzi is out with a research report on Snap-On (NYSE: SNA) after the company reported strong earnings this morning.

The stock, unlike competitor Stanley, Black & Decker (NYSE: SWK) is near a 52 week high, and continues to fire on all cylinders (pun intended).

The company reported second quarter earnings of $1.14 per share on $726.6 million in revenues. Wall Street had been expecting earnings of $1.07 per share on $726.2 million in revenues. Revenues jumped 12.2% year-over-year.

The company said it expects to spend $65 million in capital expenditures this year, of which $33.3 million was spent in the first half of the year.

In the press release, CEO Nick Pinchuk said, “We are pleased with our financial results for the second quarter, which we believe further illustrate the strength of Snap-on's value proposition to professional users performing critical tasks. As evidenced by the sales increases in the quarter, we continue to make substantial progress on our runways for coherent growth, and the improvement in our year-over-year operating income margin provides further testament to the power of Snap-on's Value Creation Processes. As always, I thank our franchisees and associates worldwide for their ongoing dedication and contributions.”

In the note, Sozzi writes, "The important takeaway on Snap-On at this point in time is that in spite of international unknowns, the valuation on the stock remains too compelling to disregard. For a company that pays a steady dividend (2.1% yield) and is expanding margins through cost out programs, pricing power (defying slowdown in industrial sector by selling to “critical industries, say companies that fix planes), and a highly profitable (and growing) receivables portfolio to trade at a forward P/E multiple well below its projected future growth rate in earnings is a mispricing that deserves investor attention. We are reiterating our Buy rating and $80.00 price target, and leaving estimates largely unchanged."

Soziz goes on to mention, "Snap-On's sales totaled $726.7 million (consensus: $726.2 million) and EPS ex. items of $1.14 (consensus: $1.07), against our $1.12 estimate. Gross margin of 47.08% was shy of the 47.35% consensus; considering how industrial 2Q11 margins were pressured by the persistence of raw material price inflation, Snap-On's miss only sells the investment these further (undervalued versus peer group). Overall, our assessment is that margins were nicely influenced by a particularly strong quarter from the Tools Group due to a “robust” product mix and a continued watchful eye on expenses. All three segments rendered year on year operating margin expansion. One thing we are monitoring is the trend in organic sales growth at all three segments, which is slowing. We think this is function of the bounce in demand immediately following the latest economic downturn, but as comparisons ease it will be important to track to ascertain potential share loss or end markets that are weakening (Europe, perhaps U.S.)."

Shares have performed measurably better than Stanley, Black & Decker this year, gaining 10.1% to SWK's ~4%. Shares are trading at less than 13 times forward earnings and sport a 2.1% dividend yield as well. It looks as if Snap-On is continuing to perform exceptionally well, and investors may want to look at this tools maker if they want to ratchet up (pun intended) growth in their portfolio.

ACTION ITEMS:

Bullish:
Traders who believe that Snap_on is likely to continue showcasing strong revenue growth might want to consider the following trades:

• At less than 13 times earnings, Snap-On is cheap at these levels. Initiating a position or adding to shares on today's reaction could prove to be profitable over time.

• Consider shorting Stanley Black & Decker as it looks like it is losing market share to Snap-On.

Bearish:
Traders who believe that Black & Decker is going to come back may consider alternate positions:

• The opposite of above, go long SWK and short SNA, if traders believe the roles will reverse.

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