SNAP-ON

RCMP
Richie HartzInvestment Presentation
Ha Da Jang
Diana Yang
Diana Yang
Iris Zhang
Ishan Prasad
Hexiyou Xu

April 16, 2013 1

AGENDA

Introduction

Company Overview

Industry Overview

Stock Performance

Financial Analysis

Valuation

Recommendation

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INTRODUCTION COMPANY INDUSTRY VALUATION
COMPANY PROFILE

• Manufacturer and marketer of tools, equipment, and

diagnostics

• Provides repair information and systems solutions

• Four business segments: Commercial and Industrial, Snap-On

Tools, Repair Systems & Information, and Financial Services

• Headquarters: Kenosha, Wisconsin

• Employs over 11,200 people worldwide

• Services professional in over 130 countries

• Has continuously paid dividends since 1939 without

interruption or reduction

• Market Cap: $4.95 Billion

Source: Snap-On Inc. 2012 10-K 3

INTRODUCTION COMPANY INDUSTRY VALUATION
COMPANY HISTORY
1956:
Acquired Joseph P
1920: Weidenhoff Company,
Snap-On Wrench manufacturer of
Company founded by timing and analysis 2005:
William Seidemann equipment Entered India
and Joseph Johnson

1920 1931 1950s 1956 1978 2005

1931: 1950s: 1978:

Entered Expanded concept of Listed on NYSE
international walk-in vans and
arena pioneered franchisee
van channel

Source: Snap-On Inc. official website 4

INTRODUCTION COMPANY INDUSTRY VALUATION
SALES BREAKDOWN

• Opportunity to grow globally as majority of sales is domestic

• Ability to leverage technology and products across customers and regions
• Economies of scale – optimize cost structure

Breakdown of 2012 Net Sales Before Financial Services of $2.94 bn

Geographic Business Segment Product

Source: Snap-On Inc. 2012 10-K 5

INTRODUCTION COMPANY INDUSTRY VALUATION
MORE ABOUT SNAP-ON

Brands End Markets

• Snap-On • Vehicle dealerships
• ATI • Repair centers
• Blue-Point • Aviation
• BAHCO • Aerospace
• Irimo • Agriculture
• Fish and Hook • Construction
• Sun and ShopKey Brands • Government and military
• Cartec • Mining
• John Bean • Natural resources & power generation

Distribution Channels

•Mobile Van Channel

•Company Direct Sales
•Distributors
•E-Commerce

Source: Snap-On Inc. 2012 10-K 6

INTRODUCTION COMPANY INDUSTRY VALUATION
PRODUCT SEGMENTS

FY2012 Revenues by Product Segment

Equipment: Diagnostics & Repair Info: Tools:

 Air compressors/Air  Fuel and engine systems  Hand tools (Aviation,
processing equipment (Compression gauge sets, brake, measuring,
 Battery charging and fuel system) headlamp, hammers,
testing  Hand held diagnostics (Gas sockets)
 Cooling system analyzers, scan tool  Power tools (Power tool
 Engine service accessories) accessories, flashlights)
 Exhaust  Testing and electronics  Tool storage (Floor mats,
 Tire and wheel (Circuit testers, computer, metal boxes, work
 Paint spray electrical) surface, roll carts)

Source: Snap-On Inc. official website 7

INTRODUCTION COMPANY INDUSTRY VALUATION
HISTORICAL FINANCIALS
Revenues Operating Earnings

Capital Expenditures Operations before FinCo - Operating Margins (%)

Source: Company 2012 10-K 8

INTRODUCTION COMPANY INDUSTRY VALUATION
KEY FINANCIAL RATIOS
2010A 2011A 2012A
Profitablility Ratios
Dividend Yield 2.2% 2.5% 1.8%
Return on Equity (ROE) 13.3% 17.9% 16.8%
Return on Asset (ROA) 6.2% 9.5% 10.2%
Profit Margin 12.1% 13.5% 13.9%

Liquidity Ratios
Current Ratio 1.91 2.20 2.37
Quick Ratio 1.46 1.50 1.63

Leverage Ratios
Debt to Equity 30% 17% 8%
Interest Coverage 5.83 6.40 7.59

Operating Efficiency Ratios

Receivables Turnover 6.03 6.16 5.91
Inventory Turnover 4.27 3.92 3.83
Payables Turnover 11.77 10.77

Receivable Conversion Period 58 61

Inventory Conversion Period 92 94
Payment Deferral Period 31 33
Cash Conversion Cycle 120 122
Source: 2012 10-K 9
INTRODUCTION COMPANY INDUSTRY VALUATION
Company Profile — Competitive Strengths

Strengths Weaknesses
Diversified portfolio catering to large customer base Revenues dependent on franchisees

Strong and effective distribution network Heavily dependent on credit risk of customers

Attractive dividend yield Significant dependence on European market

Strong and constant innovation

Stable supply of short-term raw materials

Opportunities Threats
Rising demand for power and hand tools in the US Intense competition

Growing global automotive aftermarket Exposure to commodity price fluctuations

Repair industries develop in emerging markets Financial regulatory changes

Increased costs due to new compliance and
Expand services adjacent to existing markets
environmental regulations
Extend to critical industries outside of vehicle repair

Source: Snap-On 2012 10-K, Company Annual Report, DataMonitor Snap-On Report 10
INTRODUCTION COMPANY INDUSTRY VALUATION
INDUSTRY OVERVIEW

• Sector: Industrial Goods

• Industry: Small Tools and Accessories

• Most tools are for automobile

• Growth from 4 sources:

– Franchise network

– Expand in garage

– Extend to critical industries

– Build in emerging markets

Source: Snap-On 2012 10-K, Company Annual Report, DataMonitor Snap-On Report 11
INTRODUCTION COMPANY INDUSTRY VALUATION
Porter’s Five Forces
Small Tools & Accessories

Threat of New Entrants: Low

Lack of Industry experience/ know-how

Threat of Substitute Products: Low

Matured industry with large competitors

Bargaining Power of Buyers: Moderate to High

Pricing Pressures due to intense competition and high
consumer expectations

Bargaining Power of Sellers: Moderate

High concentration of sellers, however subject to market prices

Intensity of Competition: High

Large, established players dominating market

Source: Snap-On 2012 10-K, Company Annual Report, DataMonitor Snap-On Report 12
INTRODUCTION COMPANY INDUSTRY VALUATION
GLOBAL OUTLOOK

Expected Global Trends Future Growth Drivers

• Robust consumer demand is expected to • Increased in new mobile lead to increase in

support increased production in North more tools usage

America at a moderate pace • The number of current mobile in use is

• Macro economic uncertainties affecting large enough to support sale

production in Europe • Increase in purchasing power lead to using

• Continued high expected growth in more professional tools

emerging markets

Source: DataMonitor Snap-On Report, Company 2012 10-K 13

INTRODUCTION COMPANY INDUSTRY VALUATION
EXPOSURE TO STEEL PRICE FLUCTUATION
Steel is the principal raw material

(USD/MT) LME 3-Mo. Steel

$800

$700

$600

$500

$400

$300

$200

$100

$0
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12

Source: Bloomberg 14
INTRODUCTION COMPANY INDUSTRY VALUATION
EXPOSURE TO CONSUMER CREDIT RISK

Slowdown in global economy can adversely affect the revenue collection

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INTRODUCTION COMPANY INDUSTRY VALUATION
 OTHER MACROECONOMIC INDICATORS

Annualized US Auto Sales / Parts & Tire Sales US Unemplyment & Disposable Personal Income (Billion)
20 7.5
US Auto Sales (LHS) Parts & Tire Store Sales (RHS) 11% $13,000
Disposable Income (RHS) Unemployment (LHS)
17.5 10% $12,500
7
15 9%
$12,000
8%
12.5 6.5 $11,500
7%
10 $11,000
6 6%
7.5 $10,500
5%

5 5.5 4% $10,000

Source: Bloomberg 16
INTRODUCTION COMPANY INDUSTRY VALUATION
STOCK PERFORMANCE

Source: Yahoo! Finance 17

INTRODUCTION COMPANY INDUSTRY VALUATION
SNAP-ON TOTAL SHAREHOLDER RETURN (1)

Notes:
1Assumes $100 was invested on Dec. 31, 2007, and that dividends were reinvested quarterly
2Company’s fiscal year ends on the Saturday that is on or nearest to December 31 of each year, for eas of calculation, the fiscal year end is assymed to be December 31.
3Peer Group consists of: Stanley Black & Decker, Inc. Danaher, Emerson Electric Co., Genuine PartsCompany, Newell Rubbermaid, Pentair Ltd., SPX Corporation and W.W. Grainger

Source: Company 2012 Annual Report 18

INTRODUCTION COMPANY INDUSTRY VALUATION
COMPARABLE STOCK PERFORMANCES

• GPC: Genuine Parts Company

• DHR: Danaher
• SWK: Stanley Black & Decker
• SPW: SPX Corporation
• GWW: W.W. Grainger

Source: Yahoo! Finance

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INTRODUCTION COMPANY INDUSTRY VALUATION
 Valuation — Trading Comparables
Enterprise Value / Price / NTM Enterprise Value
Forw ard Total Forw ard NTM Forw ard
Com pany Nam e EBITDA EBIT EPS Tangible BV Revenue EBITDA P/E

Snap-On Inc. (SNA) 9.7x 11.1x 16.4x 2.7x 1.81x 9.0x 15.00x

Stanley Black & Decker, Inc. (SWK) 9.6x 13.1x 15.0x 1.9x 1.37x 8.7x 14.40x

Genuine Parts Company (GPC) 10.8x 11.9x 18.6x 4.0x 0.83x 9.3x 17.30x

LKQ Corp (LKQ) 14.9x 17.3x 25.0x 3.3x 1.62x 12.6x 20.50x

Danaher Corporation (DHR) 10.8x 13.3x 18.0x NM 2.19x 10.0x 17.81x

Emerson Electric Co. (EMR) 8.4x 10.3x 16.0x NM 1.57x 7.7x 19.19x

New ell Rubbermaid Inc. (NWL) 8.3x 10.2x 38.8x NM 1.25x 8.1x 18.46x

Pentair Ltd. (PNR) 12.2x 15.5x NM NM 1.41x 9.2x NM

SPX Corporation (SPW) 10.1x 13.0x 21.0x NM 0.94x 9.6x 13.92x

W.W. Grainger, Inc. (GWW) 11.6x 13.0x 21.4x 6.4x 1.55x 9.8x 23.71x

High 14.9x 17.3x 38.8x 6.4x 2.2x 12.6x 23.7x

Low 8.3x 10.2x 15.0x 1.9x 0.8x 7.7x 13.9x
Mean 10.7x 13.1x 21.7x 3.9x 1.4x 9.5x 18.2x
Median 10.8x 13.0x 19.8x 3.7x 1.4x 9.3x 18.1x

LTM Diluted LTM Tangible NTM Revenue /

LTM EBITDA LTM EBIT EPS BV/Share Share NTM EBITDA NTM EPS
Snap-On Inc. (NYSE: SNA) 593.1 516.4 5.25 34.05 57.84 618.5 5.27
Implied Price_Mean $109.38 $115.76 $114.23 $132.89 $81.81 $100.33 $95.75
Implied Price_Median $109.52 $115.38 $104.11 $124.80 $81.55 $98.71 $95.62

Source: Capital IQ
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INTRODUCTION COMPANY INDUSTRY VALUATION
MAKING THE NUMBERS WORK
Valuation shows that Snap-On is currently trading at a discount to its peers and to its intrinsic value

Current
$81.23

• 52-week high: $56.88

52-Week Range $56.88 $85.50 • 52-week low: $85.50

• 2.5%-3.5%Perpetuity
growth rate
$81.67 $117.59
DCF • 8.57% - 10.57% WACC

• 15.0x – 21.7x LTM EPS of

5.25
Trading $79.01 $114.23
Price/LTM EPS

$50 $75 $100 $125

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INTRODUCTION COMPANY INDUSTRY VALUATION
Valuation — WACC Analysis
WACC Calculation

Capital Structure
Total Market Value of Equity 4,769
Total Debt 976
Total Capitalization 5,745

Debt-to-Total Capitalization 16.98%

Equity-to-Total Capitalization 83.02%

Beta 1.36
Risk-Free Rate 1.78%
Market Risk Premium 7.00%
Cost of Equity (CAPM) 11.30%

Cost of Debt 1.60%

Tax Rate 32%
After-tax Cost of Debt 1.09%

WACC 9.57%

Source: Bloomberg 22
INTRODUCTION COMPANY INDUSTRY VALUATION
VALUATION — SNAP-ON SANS FINANCIAL SERVICES
Fiscal Year Ended on December 29,
($ in millions) 2013E 2014E 2015E 2016E 2017E
Revenues 3,161 3,365 3,543 3,690 3,800
COGS (1,681) (1,790) (1,884) (1,963) (2,021)
Gross Profit 1,480 1,575 1,658 1,727 1,779

EBIT 416 443 467 486 500

Less: Income Taxes @ 32% (124) (132) (139) (145) (149)
EBIAT 292 311 327 341 351
Add: Depreciation & Amortization 72 76 80 84 86
Less: Capital Expenditures (72) (76) (80) (84) (86)
Less: Increase In NWC 52 (30) (22) (14) (5)
Unlevered Free Cash Flow 344 281 305 327 347
Terminal Growth Rate 3.00%
Terminal Value 5,437

Discount Rate 9.57%

Implied Enterprise Value 4,671

SNA Fair Value (before Financial Services) Sensitivity Analysis Enterprise Value 4,678
Terminal Growth Rate Less: Debt (143)
81.45 2.0% 2.5% 3.0% 3.5% 4.0% Add: Cash 211
7.57% $81.45 $81.45 $81.45 $81.45 $81.45 Implied Equity Value 4,746
8.57% $81.45 $81.45 $81.45 $81.45 $81.45
WACC

9.57% $81.45 $81.45 $81.45 $81.45 $81.45 Shares Outstanding 58.271

Fair Value before Financial Services $81.45
10.57% $81.45 $81.45 $81.45 $81.45 $81.45
11.57% $81.45 $81.45 $81.45 $81.45 $81.45 Current Stock Price $81.23

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INTRODUCTION COMPANY INDUSTRY VALUATION
VALUATION — FINANCIAL SERVICES
Fiscal Year Ended on December 29,
($ in millions) 2013E 2014E 2015E 2016E 2017E
Net Income 47 58 68 77 81
% Margin 22.2% 22.3% 22.4% 22.4% 22.4%
Less: Change in BV of Equity (47) (58) (68) (77) (81)
Other comprehensive Income - - - - -
Free Cash Flow 93 115 137 153 163
Terminal Growth Rate 3.00%
Terminal Value 2,019

Discount Rate (Cost of Equity) 11.30%

Enterprise Value 1,653

Financial Services Fair Value Sensitivity

Terminal Growth Rate
Enterprise Value 1,653
$14.24 2.0% 2.5% 3.0% 3.5% 4.0%
Less: Debt (827)
9.30% $19.42 $21.39 $23.68 $26.36 $29.54
Add: Cash 3
10.30% $15.19 $16.65 $18.31 $20.21 $22.41
Implied Equity Value 830
WACC

11.30% $11.88 $12.99 $14.24 $15.64 $17.24

12.30% $9.21 $10.08 $11.04 $12.12 $13.32 Shares Outstanding 58.271
13.30% $7.02 $7.71 $8.48 $9.32 $10.25 Fair Value (FinCO) $14.24

Total Fair Value Sensitivity

Terminal Growth Rate
$95.69 2.0% 2.5% 3.0% 3.5% 4.0% Fair Value (FinCO) $14.24
7.57% $95.69 $95.69 $95.69 $95.69 $95.69 Fair Value before Financial Services $81.45
8.57% $95.69 $95.69 $95.69 $95.69 $95.69 Total Fair Value $95.69
WACC

9.57% $95.69 $95.69 $95.69 $95.69 $95.69

Current Stock Price $81.23
10.57% $95.69 $95.69 $95.69 $95.69 $95.69
% Discount 18%
11.57% $95.69 $95.69 $95.69 $95.69 $95.69 24
INTRODUCTION COMPANY INDUSTRY VALUATION
RISKS & DECISION DRIVERS

Risks
(1) Earnings release in 2 days

(2) Competitive Market Segment

(3) Macroeconomic Landscape

Decision Drivers
(1) GICS Diversification

(2) Stronger growth compared to peers

(3) DCF Valuation

INTRODUCTION COMPANY INDUSTRY VALUATION

RECOMMENDATION

Buy 100 shares @ Market Price

Illustrative purposes:
100 * $81.23 = $8,123

INTRODUCTION COMPANY INDUSTRY VALUATION

Snap-On Incorporated

Questions?

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