While I like fast-rising growth shares, I don’t like the rollercoaster ride of high profits one year and big losses the next. Instead, a slower, smoother ride to riches appeals more to me.
Sometimes, it’s the most practical businesses that offer this, and Snap-on (NYSE:SNA) is in the tooling business.
A handy investment to have
This company was founded in 1920 and became publicly listed in 1978. It’s quite a historic firm, and it just seems to keep on growing. Today, it’s a global provider of top-end tools, equipment, and software for professional use.
It operates as a franchise, and it has a handy personal credit service to help technicians afford tools. Products are sold through franchisee-operated mobile vans. Its operations are certainly unique.
Rock-solid financials
Snap-on has more equity than liabilities on its balance sheet. This means that in the case of an economic downturn, the firm has some breathing room. Having too much debt can also inhibit the growth of a business over the long term.
Additionally, the investment ranks highly on the profitability scale. Its net income is almost 20% of total revenues, which is in the top 7.5% of companies in the industrial products industry.
Over its listed history, Snap-on has significantly beaten the S&P 500, which is the most popular US benchmark for stock market performance:
What I pay versus what I get
In investing, one of the foundational rules of success over time is making purchases based on good value. If I buy a company’s shares at more than what they’re worth, I’m less likely to get great returns over time. That’s unless the business enjoys incredibly high, unexpected growth.
Instead, looking for undervalued shares provides me with what famous investor Benjamin Graham coined as a “margin of safety”. This method provides me with a cushion against potential losses, lowering the risk I take on.
With a price-to-earnings ratio of just 14.5, I think the investment is selling relatively cheaply. There’s also another famous valuation method called discounted cash flow analysis. Based on this, using historical growth rates forecast over the next decade, the shares appear to have approximately a 15% margin of safety.
Critical risks
I consider Snap-on a low-risk investment. However, there are still some key issues that could cause problems for me if I become a shareholder.
For example, a massive 77% of its revenue comes from the US. That means it has low global diversification, and a hit to the American economy could impact it more than other firms that have evenly distributed worldwide operations.
Also, people who work at the company have been selling shares recently. To be specific, insiders have sold 582k shares in the last three years and have bought none. That could be an indication that management believes the stock is past its prime, at least for now.
Worth me buying
Yet as long as I can buy the shares before others catch on, I think I’ve found an undervalued winner. It only takes a few big investors to drive up the price and remove that margin of safety, though. So I’m aiming to buy it sooner rather than later!
This post was originally published on Motley Fool
