Business Breakdowns
· Matt Fleming
[00:00:00] S1: One of the hallmarks of our process on the William Blair Value team is we're big believers in historical valuation. We think that looking at comps is great. But as we like to say, if there's a cheap company in a universe, you might find that that's like buying the cheapest house in an overpriced neighborhood. So it doesn't tell you what the universe does. The other thing is that I think you can get false positives and false negatives. Said another way, there's some companies that just frankly trade in their own valuation orbit. So it's really important to understand where you are relative to that. Fortunately, Snap-on has been around a while. It's a pretty seasoned trading history. And this is pretty unusual, but what we do is we go back and we look at historical valuation metrics on an average of a 5-year, 10-year and 20-year basis. And for Snap-on, they're very similar actually in all three periods. So if you look at the PE on a 5, 10 and 20-year basis, it's traded between 13 and 17 times. And so if you look at next year's estimates, that would imply a range of something like $270 to $360 for Snap-on. Same thing for EV/EBITDA. 8.5 to 12 times gets you to something like $260 to $364. Personally, I like PE a little bit better with this company because of the finance company, but I think they’re actually kind of shaken out pretty similarly. But what I would tell you is when you do look at the comps, I would say the stock does look undervalued. Comps is tricky, so I think what I looked at was Enerpac Tool, which is a manufacturer of high-precision hydraulic tools. That stock trades at a PE of 23, 15 times EV/EBITDA. ESAB and Lincoln Electric are both welding companies. Very high consumable business, but sort of industrial-tooly. Those companies trade at very similar valuations, over 20 times PE, and 15 times EV/EBITDA. I do think there is the potential for Snap-on to rerate.
· Matt Reustle, Matt Fleming
[00:00:00] S0: If I'm asking you to make an assumption on those other names and why they would trade where they do versus Snap-on, is it the finance business? Is it the growth characteristics of those businesses? Is there something that would be the easy explanation of the valuation gap between them? [00:00:00] S1: If I had to guess, it's probably the consumable element, when I look at those welding companies. I think the finance business is misunderstood for Snap-on, so I do think that plays a role. For a very significant company in terms of brand and recognition, for an $18 billion market cap company, there's surprisingly little sell-side coverage. There's nine analysts who cover this name. That's actually as high as it's ever been. It is a little unusual for a company of this size and stature. [00:00:00] S0: Absolutely. I think it's not a household name, which is quite interesting. And when I saw the market cap, I was quite surprised. A lot of people know the other SNAP that trades in the market and they couldn't be two more different businesses. [00:00:00] S1: Not a lot of overlap I think in that investor base. [00:00:00] S0: No, I would agree. Well, this has been a fascinating discussion. I have learned so much. Thank you for explaining it in so many different ways. We close these out with the lessons that you can take away from a business and potentially apply elsewhere. What stands out for Snap-on?
· Matt Reustle, Matt Fleming
[00:00:00] S0: No, I would agree. Well, this has been a fascinating discussion. I have learned so much. Thank you for explaining it in so many different ways. We close these out with the lessons that you can take away from a business and potentially apply elsewhere. What stands out for Snap-on? [00:00:00] S1: Well, I think there's five. And one is that I think it's a great lesson to identify end markets where there's a natural demand. In this case we're talking about that automotive turnover, we're talking about the value of the tool to the technician, and secular tailwinds. Number two, I would say innovate differentiated products that can command brand loyalty and a price premium. So we talked a lot about innovation and their loyal customer base. Three, have that value-added unique distribution. I think you can really see the impact that's had on the tools margin and really the value to the consumer. Fourth, I think the continuous improvement speaks for itself, and the margin improvement in the tools business. And then finally, leadership matters. It really starts at the top. And Nick Pinchuk I think is an iconic CEO. There's some obviously well-known other CEOs out there, and I think Nick's name is not always mentioned with them, but it probably should be. I would say those are my five lessons. [00:00:00] S0: Excellent. An excellent way to close it out. Thank you very much Matt for sharing the knowledge.