Business Breakdowns
· Matt Reustle, Matt Fleming
[00:00:00] S0: On the capital allocation side, you mentioned there can be lumpiness in free cash flow. What is their general strategy in terms of allocating capital? It feels like, because of the franchise model, there's unique dynamics here. What does that look like? [00:00:00] S1: They're buying back some stock. They've got a dividend. They are looking for opportunistic acquisitions. They're actually redeploying their capital in this finance company, which has been a pretty good use of their equity when they're getting those returns. They're spending probably 2% a year on R&D. So they are very efficient with their capital. They don't have a ton of capital expenditures. Probably the biggest source of redeployment is putting it back into that finance company. [00:00:00] S0: And on the M&A front, when they do make acquisitions. I know way back when it was a tool manufacturer. Is that still what it looks like? Is there anything else that falls into the potential crosshairs? [00:00:00] S1: No, this would primarily be tools. And so they bought a brand fairly recently that gets them into the specialty torque business, which is a niche for them. I would say the others are pretty similar. So that was called Mountz, that was a $40 million acquisition. AutoCrib was another tool storage business, about $36 million. So what I would say is it's just going to be getting into smaller adjacencies where they can acquire a brand that's going to be attractive for them.
· Matt Fleming, Matt Reustle
[00:00:00] S1: No, this would primarily be tools. And so they bought a brand fairly recently that gets them into the specialty torque business, which is a niche for them. I would say the others are pretty similar. So that was called Mountz, that was a $40 million acquisition. AutoCrib was another tool storage business, about $36 million. So what I would say is it's just going to be getting into smaller adjacencies where they can acquire a brand that's going to be attractive for them. [00:00:00] S0: Thinking about potential headwinds again. I know we've bounced around and then addressed a ton. If you just think about the overall auto market. Whether it's a reduction in the number of vehicles owned per household, whether or not that's actually playing out, but it's a commonly discussed theme. Are there themes like that that you can point to as potential headwinds or structural market dynamics that you see or worry about?
· Matt Fleming
[00:00:00] S1: Well, I wouldn't say it's the auto headwinds themselves that I worry about. My personal view is, you are going to see a lower number of OEM manufactured cars. And the reason you're going to see that, Matt, in my opinion, is the auto OEMs really want to manufacture higher price point cars. So 15 years ago there might have been an entry level, call it a $20,000 automobile. Those are really hard to find right now. And obviously the OEMs want to manufacture $50-plus thousand dollars SUVs. On the margin, I think you're going to have fewer new builds. But the positive is that you are going to have a very robust used market and you're going to see people hang onto their cars a lot longer. And so right now the average age of the car park or fleet is over 12 years. And that used to be in the single digits, call it 10 years ago. So people are certainly keeping their cars a lot longer. And then over time, that's going to mean increased repairs. In the old days, if you bought a car every three or four years, or if you leased and you turned it in, you might not want to repair it as frequently. Now you are going to do that. So I think that's actually a structural tailwind for Snap-on. I think where you could see some challenges though, is that ultimately this is a people business. And if you look at the number of new entrants over time, it's unclear to me how many people are getting into the auto repair market. You certainly look at other industrial end markets, like long-haul trucking for example, and it's just very hard to find people to enter that industry. So over time, if younger folks don't want to get into automotive repair as a career, that might just put pressure on the number of participants in it.
· Matt Reustle, Matt Fleming
[00:00:00] S0: It's something I was thinking about as well, because when I covered the Trucking sector, those two roles were frequently mentioned as massive shortages that were perpetual. It was auto repair mechanics and then long-haul truckers. In trucking, there's kind of an obvious impact that that can have when you see capacity come out of the system. But you see it recover quite quickly. In auto repair, it's a little less clear to me what that impact looks like. Whether it just drives the price of auto repair higher. What do you think it actually means if you do see a shortage of labor in that market that persists? [00:00:00] S1: I think in the short term, that's gonna give pricing power to the mechanics who are really saying, "All right, I've only got a certain number of hours in the day. If I'm going to work on your car, you're going to have to pay for it." The other thing I would just throw into that discussion, Matt, is I don't know what immigration trends look like, and how that impacts the number of participants as well. I think you could see fewer people getting into the business, fewer technicians, higher pricing, probably longer wait times. Maybe on the margin, that discourages you from getting your car repaired, if you say, "I can't wait three weeks and I don't want to spend this money." But I think this all takes place over a longer period of time.
· Matt Fleming, Matt Reustle
[00:00:00] S1: I think in the short term, that's gonna give pricing power to the mechanics who are really saying, "All right, I've only got a certain number of hours in the day. If I'm going to work on your car, you're going to have to pay for it." The other thing I would just throw into that discussion, Matt, is I don't know what immigration trends look like, and how that impacts the number of participants as well. I think you could see fewer people getting into the business, fewer technicians, higher pricing, probably longer wait times. Maybe on the margin, that discourages you from getting your car repaired, if you say, "I can't wait three weeks and I don't want to spend this money." But I think this all takes place over a longer period of time. [00:00:00] S0: When you put it all together, thinking about the framework that you would use here for this type of business, valuation wise. What type of approach do you take, and how does that differ, if at all, from how the market views the stock?
· 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.