BINGHAMTON INVESTMENT FUND Snap-On Inc. Sector Head: Vienna Buscher Junior Analyst: Christopher Suchecki On Inc. Inc. On November 5, 2019 - NYSE: SNA | Price Target: $198 | Upside: 17.3% | 10 Shares Binghamton Investment Fund | Snap Fund Investment Binghamton 2 Agenda SNA Company Overview Industry Overview On Inc. Inc. On - SNA Market Position Investment Thesis & Catalysts Valuation Risks & Mitigations Binghamton Investment Fund | Snap Fund Investment Binghamton 3 Long PT: Upside: 10 Executive Summary SNA $198 17.3% Shares Catalysts Relative Valuation SNA Industry Avg. 25x Favorable Automotive Trends 19.60x 20x 17.56x 13.48x On Inc. Inc. On 15x 12.83x - Promising Segment Expansion 8.60x 9.45x 10x 2.22 2.36x 5x x End Market Diversity & Security - PE EV/EBITDA EV/EBIT EV/Sales Stock Performance Key Metrics 80% Share Price $168.76 SNA S&P XLI 60% 52-Wk High/Low $174.46 / $135.29 Market Cap $9.23bn 40% P/E Ratio 12.83x 20% Debt/Equity Ratio 0.72x Binghamton Investment Fund | Snap Fund Investment Binghamton 0% Beta 0.96 2014 2015 2016 2017 2018 Credit Rating A- / A2 / A -20% 4 Company Overview Company Revenue & EBIT Margin • Global tool & industrial solutions $4,400m 24% 23% manufacturer $4,000m 22% On Inc. Inc. On • - Main focus on serving auto segment $3,600m 21% • Sales partially through franchisees $3,200m 20% • Franchisee trucks sell tools, B2B model 2015 2016 2017 2018 2019E 2020E • Current share buyback program at $158 Revenue EBIT Margin Segments Franchise Model 1.Snap-On Tools 3,465 • Hand tools, B2B market, 40% of revenue 3,445 Outstanding Franchisees 2.Commercial & Industrial 3,425 • Specialized instruments, 26% of revenue 3,405 Source: SNA Mgmt. 3.Repair & Information Systems 3,385 • Diagnostics & software, 26% of revenue 2012 2013 2014 2015 2016 2017 4.Financial Services • Mobile van franchises travel to customer locations Binghamton Investment Fund | Snap Fund Investment Binghamton • Tool & franchise financing, 8% of revenue and pitch products • Customers able to finance purchases through corporate financing division; ease of credit promotes purchases 5 Industry Overview Competitive Environment Macroeconomic Factors • SNA has ~8% global market share, highly • Tool sales & car repairs inversely related to car fragmented market with no clear leader sales – stable performance in recession On Inc. Inc. On • • Essential car repairs required in all economic - No unique competitor across all segments conditions, not discretionary • Compete based on quality, price, and innovation • U.S. spending on vehicle repairs up ~3% YoY • Innovation in software & diagnostics division Customer Segments Global Power Tool Sales • Distribution through franchisee trucks, direct sales, distributors, and e-commerce 5.3% CAGR, Historically Stable • Vehicle repair technicians represent main customer segment $31.8bn Current Valuation • Secondary segments include: defense, aerospace, Binghamton Investment Fund | Snap Fund Investment Binghamton household users, heavy construction & mining Concentrated in U.S., Growing in Asia Source: Markets & Markets Research 6 SNA Market Position Brand Positioning Internal Competitive Advantages • Positioned as higher quality brand than 1. High diversification through acquisitions & competitors capacity for future acquisitions • Especially consumer tool manufacturers On Inc. Inc. On 2. Global Presence: 130+ countries - • Primarily serves the B2B market 3. High scalability through franchise model - • Focus on innovation (software & diagnostics) most robust among competitors and quality (core products, ie. hand tools) 4. Rapid Continuous Improvement Initiative Exploratory Opportunities RCI Initiative • Easy expansion into the consumer tool market • Rapid Continuous Improvement (RCI) • Similar to core products, different price point and initiative systematically reduces costs & boosts distribution channels manufacturing efficiency • Strategic integration with truck fleet Offset Increased 2018 management businesses 2% Gross unfavorable operating margin benefit currency Binghamton Investment Fund | Snap Fund Investment Binghamton • Growing relationship with vocational schools earnings $7.2m translation • Boost product familiarity early in career 7 Investment Thesis Catalysts Favorable Automotive Trends • Increasing average age and complexity Favorable Automotive Trends of vehicles On Inc. Inc. On - Promising Segment Expansion • Demand for specialized tools growing • Incorporation of software & End Market Diversity & Cash Flow Security diagnostic “smart” tools Promising Segment Expansion End Market Diversity & Security • Diagnostics & commercial segments • Tools have high applicability across showing promising growth many industries, are highly necessary • Robust acquisition history boosts Geographic Distribution market share and growth North America Europe Other Binghamton Investment Fund | Snap Fund Investment Binghamton • Capital structure supports further M&A 70% 19% 11% 8 Favorable Auto Industry Trends Increasing Average Vehicle Age Cars with Internet Capabilities 12 Yrs Global Installed Car Bases Percent with Network Solutions 1.4bn 25% 10 Yrs 1.3bn 20% On Inc. Inc. On - 1.2bn 15% 8 Yrs 1.1bn 10% 1.0bn 5% 6 Yrs Source: 0.9bn 0% Source: 1980 1985 1990 1995 2000 2005 2010 2015 2018 SNA Mgmt. 2012 2013 2014 2015 2016 2017 2018 2019 2020 McKinsey Translation for Snap-On • As vehicle age increases, customers choose • Growing car complexity demands tool repairs over new vehicle purchases innovation • Boosts mechanic market, need for tools • Electric & autonomous vehicles, among others, • During economic recession, new vehicle sales driving change in design & tool needs slow greatly – boosts need for repairs & tools • Increasing need for SNA’s info. & diagnostic products, their fastest growing segment Binghamton Investment Fund | Snap Fund Investment Binghamton • Mechanic’s need for new tools constant in all • economic conditions SNA actively growing diagnostics portfolio through M&A, 5+ relevant recent acquisitions 9 Promising Segment Expansion Diagnostics Segment Strategic Acquisition History • Market leader in repair diagnostics and • Constant history of M&A involvement information systems software • Primary focus on emerging information & diagnostic • Growing need for diagnostics with increasingly segment growth, significant similarities & synergies On Inc. Inc. On - complex vehicles, more growth in emerging markets • Capital Structure promotes continued M&A • Key differentiator from hand-tool competitors Debt/Equity: 0.73x Current Ratio: 2.33x • 21% sales growth from 2015, 5% YoY run-rate per management’s guidance Interest Coverage: 18.9x Cash on Hand: $141m Commercial & Industrial Segment Notable Recent Acquisitions • Custom tool solutions for aerospace, Fastorq, 2018 Expanded current torque tool government & industrial customers Norbar, 2017 portfolio, industrial segment use • Consistent customer base w/ repeatable sales • 17% sales growth from 2015, 4.5% YoY run rate per BTC Global, 2017 Inspection software systems, management’s guidance Car-O-Liner, 2016 commercial & industrial segment use Binghamton Investment Fund | Snap Fund Investment Binghamton • Benefits from government spending projects, existing relationship with U.S. municipalities Cognitran, 2019 Repair software systems, information TMB, 2019 & diagnostics segment use 10 Security in End Markets & Cash Flows Diverse End Markets Franchise Model • Product needed across numerable sectors, • Service vehicle repair technicians through highly adaptable to easily fit diverse needs franchised mobile vans • Model allows quick growth in emerging segments On Inc. Inc. On • - Sales presence across 130+ countries and 14 without significant capital expenditures distinct subsectors • Largest subsectors: automotive, A&D, oil & gas • Ease of financing for franchisees through SNA’s financing division • Diverse product portfolio, no majority segment • Stable revenue through ongoing fees & contracts Broad Industry Outlook Strong Dividend History • High single-digit YoY growth in Chinese car • Consecutive quarterly dividends without ownership rates reduction since 1939 • Mechanic salaries up ~4% YoY, strong outlook $5.5 $4.5 16% Avg. Growth $3.54 • Clear indicator of customer market strength $3.5 • Global power tool demand growing ~5% YoY $2.5 Binghamton Investment Fund | Snap Fund Investment Binghamton • Ease of credit for customers in global interest $1.5 rate environment $.5 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 11 Valuation PT: $198 NTM EV/EBIT EV/EBIT Investment Rationale NTM… • Undervalued compared to peers EV/EBITDA • No comparable company spans all segments NTM PE On Inc. Inc. On • - PE Strong dividend commitment adds value to DDM DDM metrics DCF Multiples • DCF Growth ~31,000 shares purchased recently by insiders at $125 $175 $225 $275 $325 weighted avg. price of $157 Sensitivity Analysis • Management forecasts eventual ~4.5% total growth, higher for innovative diagnostic segment WACC WACC 7.9% $ 194.82 6.9% 7.4% 7.9% 8.4% 8.9% Terminal Growth Rate 1.9% 2.5% 262.76 234.74 211.94 193.03 177.10 EV/EBITDA Multiple 11.41x 2.2% 248.82 223.73 203.07 185.77 171.06 1.9% 236.57 213.93 195.09 179.17 165.54 1.6% 225.71 205.15 187.88 173.17 160.48 Repurchased ~1.1m shares in 2019 Growth Rate 1.3% 216.03 197.25 181.33 167.68 155.83 SNA CEO: “Shares are inappropriately priced” Binghamton Investment Fund | Snap Fund Investment Binghamton 12 Risks & Mitigations Expansion into fast-growing diagnostics & Fragmented & competitive nature of repair software segment
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