Every year, InvestorPlace holds a “Best Stocks” competition in which 10 investment professionals and financial journalists go toe-to-toe with each other, picking one stock they think will outperform all others in the calendar year.
Somehow I elbowed my way into the frenzy this year, and my pick for the contest was Snap-on Incorporated (SNA) stock.
To-date, SNA stock hasn’t been the best pick. As I write this, it’s down 7% on the year … not quite up to par with the 1% return of the S&P 500 Index. Snap-on stock’s miserable performance has earned me my current well-deserved position in the middle of the pack.
But enough with the self-deprecation — I picked Snap-on for a reason, and despite its lousy start to the year, I stand by the rationale for my choice.
With three quarters of the year to go, here’s a little bit about SNA stock and why I still think it’s a winner:
SNA Earnings Still Impressive
Snap-on is a well-run, financially stable company in an industry not prone to major swings or sudden disruption, which is a major reason I picked it to outperform in 2016, which I figured to be a low-growth, somewhat turbulent year. Snap-on manufactures and markets tools and diagnostic equipment, and also acts as a franchisor for entrepreneurs looking to sell wares under the Snap-on name.
SNA stock’s major snag in the first three months of the year came in early February when it reported fourth-quarter earnings. Earnings per share were good, actually: adjusted EPS of $2.22 rose 12.7% from the year-ago period, and exceeded the Street’s consensus figure, which called for EPS of $2.18.
Alas, sales fell short of expectations, and Snap-on’s $851.7 million in revenue rose just 0.7% year-over-year, and was well beneath the $886.56 million analysts were looking for.
You might wonder: How exactly is that impressive?
Well, the stagnant revenue figures were indeed a disappointment, but the fact that SNA stock was able to grow earnings per share meaningfully and by more than consensus estimates is a testament to the company’s efficiency, which I touted in my initial article three months ago.
It’s a continuation of an encouraging trend for shareholders, which I highlighted with the following statistic in my bullish piece on SNA at the beginning of the year:
“While sales have risen 6.8% annually for the last five years, earnings have risen at nearly quadruple that pace, soaring 25.2% per annum over the same period.”
Pretty compelling.
Importantly, both of the major issues that dragged down Snap-on’s revenue growth in the fourth quarter would seem to be abating in the first quarter of the year.
The biggest weight on SNA revenue was foreign currency headwinds, which docked revenue to the tune of $33.2 million. Had there been no change in exchange rates, Q4 revs would’ve come in at $884.9 million, virtually in-line with the $886.56 million analysts expected.
In the first quarter, the dollar has lost ground against most major foreign currencies; with 31% of sales coming from overseas in 2015. That should give SNA a nice little boost in the first quarter.
Snap-on sales to customers in the oil and gas industry also fell in Q4, as the average price of oil was significantly lower than the year before. But with energy prices on the rebound in Q1, that trend should also become less powerful or cease altogether in Q1.
Revenue in the Snap-on Tools Group, the largest segment of the business by revenue, remained relatively robust, growing by 6.1% in Q4. That’s a great sign going forward, and I believe it shows that SNA stock can be the steady Eddie I thought it would be in 2016.
Although my pick hasn’t broken any records to start the year, all of the positives about the stock — its ability to consistently grow earnings, its stable business and the modest valuation (forward P/E of 16) and dividend (1.5%) — remain intact.
In other words, “It ain’t over ’til it’s over.”
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
