Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – April 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Snap-on Inc. (SNA) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Snap-on Incorporated (Snap-on) is a manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users. Snap-on’s products and services include hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as customers in industries, including aviation, aerospace, agriculture, construction, Government and military, mining, natural resources, power generation and technical education. The Company business segments include the Commercial & Industrial Group, the Snap-on Tools Group, the Repair Systems & Information Group, and Financial Services. Snap-on also derives income from various financing programs to facilitate the sales of its products. Snap-on markets its products and brands through a number of distribution sales channels in more than 130 countries.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$96.87|
|Value Based on 0% Growth||$56.79|
|Market Implied Growth Rate||7.21%|
|Net Current Asset Value (NCAV)||-$4.21|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Snap-on Inc. (SNA) is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.63 in 2011 to an estimated $6.68 for 2015. This level of demonstrated growth is greater than the market’s implied estimate of 7.21% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Snap-on Inc. (SNA)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Snap-on Inc. (SNA) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.