Snap-on in Barrons

This weekend, Barron’s had an interview with Dan Veru, the CIO at Palisade Capital Management. He has some nice things to say about Snap-on (SNA).

Where, specifically, do you see value in small-cap companies?

I’ll start with Snap-on [ticker: SNA], which sells a broad array of tools and software for the automotive-services industry. It manufactures and markets tools, and as cars have become increasingly electronic, Snap-on also has some of the diagnostic equipment.

The stock fetches almost 19 times next year’s earnings estimate of $9 a share. What justifies this above-market valuation?

The visibility of the earnings and revenue growth, along with the cash-flow generation. Earlier this month, the company announced a 15% increase in its quarterly dividend, from 53 cents to 61 cents a share. That’s a nice jump. Their business depends on people using their cars, and the best measure of that is miles driven, which is up significantly. While gasoline prices are down, consumption of gasoline is up, because people are driving their cars more and the cost is significantly less every time you go to the pump and pay. Anytime the number of miles driven increases, it means that things break, wear out, and have to be replaced. That is a driver for the tools that Snap-on makes, including chisels, screwdrivers, and pliers, and, at the higher end, software.

Snap-on shares are above $170. What is your price target?

We have a price target of $180 within the next six months, but I could easily see the stock above $200 in a year to 18 months. The visibility of earnings and revenue growth is attractive, and that’s what you are paying for.

By the way, after saying we’re focused mainly on U.S.-centric companies, Snap-on has exposure outside the U.S. But those same trends—notably, more miles driven—are happening globally. And in Europe, gasoline prices have come down. About 65% of the company’s sales come from the U.S., with another 20% from Europe.

Snap-on recently gave us a solid earnings report plus a 15% dividend increase. It’s a 25% winner for us this year.

Posted by on November 30th, 2015 at 8:57 am

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