Take the “P” off Snap Inc’s (NYSE:SNAP) stock symbol, and you get Snap-on Incorporated (NYSE:SNA), what I consider the better buy among two beaten-down stocks.
I recently had a discussion with my wife about how Facebook Inc (NASDAQ:FB) and Twitter Inc (NASDAQ:TWTR) are losing the youth, while Snapchat and WhatsApp are captsnivating them.
A new survey of American teenagers aged 13-17 found that 75% use Snapchat. That’s a lot of teenagers. By comparison, 66% of teens use Facebook, about the same amount as in 2015. While Twitter is used by just 47% of teenagers.
A recent article in MarketWatch suggested that a merger between Snap and Twitter would help both companies fight Mark Zuckerberg. Given the lack of Twitter users by teenagers, a tie-up would certainly give the merged business a greater piece of the social media pie, both regarding total users and the type of users.snap
Frankly, I don’t see a downside, except for the fact that any transaction value placed on a merger wouldn’t net SNAP shareholders the $30 billion Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) was allegedly ready to pay Evan Spiegel and company in 2016.
Why Not Snap?
My most recent article about SNAP stock discussed how even CEO Evan Spiegel’s wife used Instagram to send out photos of their wedding. Yes, some teens use as many as five messaging apps to get the word out, so it’s not unreasonable for Miranda Kerr to use Instagram from time to time, but it looks terrible for Snapchat and SNAP shareholders.
InvestorPlace’s James Brumley recently discussed how Snap Inc’s buyout potential is nothing but hype, arguing that a “white knight” isn’t on the horizon.
“A whole slew of other CEOs were at one point where Spiegel is now, similarly convinced their product or service was worth more than it was, ultimately punishing investors who proverbially drank the Kool-Aid,” wrote Brumley August 10. “The Snapchat story appears to be cut from the same cloth, with most CEOs of potential suitors all too aware of how things shook out with Fitbit Inc (NYSE:FIT) and Groupon Inc (NASDAQ:GRPN). ”
Unfortunately, if you bought SNAP stock near its 52-week high of $29.44, and you’re still holding, you’re going to be waiting a long time to recover your investment no matter how many good things Cantor Fitzgerald has to say about Snapchat’s growing customer engagement.
Why SNA Stock?
Since the market bottom on March 5, 2009, Snap-on stock is up more than 500%. Compare that to the roughly 200% gain for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) over the same period. Snap-on’s stock’s moved significantly higher because its earnings moved higher. Since the end of 2009, Snap-on’s earnings have increased 21.8% on annualized basis over the past seven fiscal years.
Not coincidentally, Snap-on’s stock price in the 101 months since the market lows of 2009 has an annualized total return of 26.3%. SNA illustrates why they say stock prices are driven by earnings growth. Long term, they follow in lock step. The question is, will they keep moving higher?
With its stock price down 17% year-to-date, investors believe SNA stock is due for a breather.
Snap-on’s second-quarter report was solid, and while some pundits see the company’s margins higher as a result of its financial services business, it’s hard to deny that Snap-on’s done a good job growing its operating margins since 2009, doubling them to 24.9% in 2016.
Interestingly, if you look at Q2 2017, you’ll see that two out of three of its operating segments had strong organic sales growth, not surprising given the average age of vehicles on the road is 11.6 years.
As long as cars and trucks need repairs, Snap-on’s business will continue to grow.
Why Not SNA Stock?
Snap-on’s financial services business finances some of its customers’ tool purchases. At the end of the second quarter, it had $1.9 billion in gross financing receivables outstanding yielding between 9.1% and 17.9%. With rising interest rates, it’s possible the company could see increased delinquent loans and losses to the portfolio, but the company doesn’t see any issues at this point.
At the end of the second quarter, Snap-on’s financial services portfolio had a delinquency rate (customers 60-plus days late) for extended credit of 1.4% in the U.S., which represents 89% overall and 0.6% internationally for the remaining 11%.
It’s something to keep an eye on, but not a deal breaker. It’s been a part of Snap-on’s successful business for a long time.
Bottom Line on SNAP and SNA
There’s no comparison between SNAP stock and SNA. With one you get a money loser struggling to find its way; with the other, you get a well-run business serving an essential piece of our economy.
While SNA might move lower from where it currently trades, this is a long-term winner. Snap is not.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.